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Nasdaq Erie 2021 PDF
Nasdaq Erie 2021 PDF
Erie Indemnity
Company
Annual Report
Our Founding Purpose
To provide our Policyholders with
as near perfect protection,
as near perfect service as is
humanly possible, and to do so
at the lowest possible cost.
Workplace Honors
America’s Best Large America’s Best-in-State Black EOE Journal Best of
Employers 2021 Employers 2021 the Best 2021
Forbes Forbes, for Pennsylvania Top Insurance Companies
category
Best Employers for 2021 Diversity Impact Awards
Diversity 2021 Global ERG Network, 2021 Best Award
Forbes three awards Association for Talent
Development
2021 Elite 50 Internships
Rising Insurance Star Executive
2021 ANNUAL REPORT | 13
Erie Indemnity Company Financial Highlights
(dollars in millions except share data)
Investment income 40 33 67
$5.93*
$4.215
30.1%
$6.06
$3.665
25.3% $5.69
23.5% $5.61
Erie Insurance Property Erie Insurance Flagship City Erie Family Life
& Casualty Company Company Insurance Company Insurance Company
Erie Insurance
Company of New York
Board of Directors
J. Ralph Borneman, Jr., CIC, CPIA Thomas B. Hagen
President, Chief Executive Officer and Chairman of the Board, Erie Indemnity Company; and
Chairman of the Board, Body-Borneman Chairman, Custom Group Industries
Insurance & Financial Services, LLC
C. Scott Hartz, CPA
Eugene C. Connell, FCAS, CFA, CPCU Director, INRange Systems, Inc.; and
Independent Investor and Advisor, Erie, PA Managing Director, INRange Investor Group, LLC
Salvatore Correnti, CFA, CCM, FLMI Brian A. Hudson, Sr., CPA, CGMA, CTP
Retired Non-Executive Vice Chair of the Board Retired Executive Director and Chief Executive Officer,
of Directors, Conning Holdings Corporation Pennsylvania Housing Finance Agency
LuAnn Datesh x x
C. Scott Hartz x x
George R. Lucore x x x x
(1) As the non-executive Vice Chairman of the Board, Jonathan Hirt Hagen performs the duties (including ex officio membership on committees) of the Chairman of the
Board when the Chairman of the Board is absent or unable to act or during such time as no individual is serving as Chairman of the Board. The Vice Chairman of the Board
also performs such other duties as from time to time may be assigned by the Board of Directors.
(2) As the non-executive Chairman of the Board of Directors, Thomas B. Hagen serves, ex officio, as a non-voting member of the Audit Committee, and a voting member
of all other committees.
(3) The Chairman of the Board has delegated his ex officio status on the Risk Committee to the Vice Chairman of the Board.
Senior Leadership
Jeffrey W. Brinling, CPCU Keith E. Kennedy
Senior Vice President, Corporate Services Senior Vice President, Next Level Innovation
A talented ERIE team collaborated on the production of the 2021 Annual Report: Katie Yenny, design; Jennifer Duda and
Christine Palattella, content; Bruce Bennett and Edward Bernik, photography; Scott Beilharz and Robert Scalise, Treasury;
Maureen Krowicki, Chandra Burns and Rebecca Buona, Law; Brent Johnson, Alex Macrino and Jessica Oldham, Finance;
Kathy Felong, Strategic Communications; Dennis Morell, Penny Allen, and Dorian Otero-Flanagan, Creative Services.
The F.W. Hirt Quality Agency Award is the highest honor bestowed on an
ERIE agency. It recognizes long-term profitability and growth, thorough and
responsible underwriting practices and continuing commitment to education.
Field Offices
Active States
Home Office, Erie Field Office
Field Offices
This Annual Report includes the Company's Audited Financial Statements and excerpts from the Company's full Form 10-K
report as filed with the Securities and Exchange Commission (“SEC”) on February 24, 2022.
The complete Form 10-K can be found on the SEC Web site at www.sec.gov.
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2021
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-24000
Pennsylvania 25-0466020
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
100 Erie Insurance Place, Erie, Pennsylvania 16530
(Address of principal executive offices) (Zip Code)
814 870-2000
(Registrant’s telephone number, including area code)
Class A common stock, stated value $0.0292 per share ERIE NASDAQ Stock Market, LLC
(Title of each class) (Trading Symbol) (Name of each exchange on which registered)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405
of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or
an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging
growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐
Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal
control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that
prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Aggregate market value of voting and non-voting common stock held by non-affiliates as of the last business day of the registrant's most recently
completed second fiscal quarter: $4.9 billion of Class A non-voting common stock as of June 30, 2021. There is no active market for the Class B
voting common stock. The Class B common stock is closely held by few shareholders.
Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date:
46,189,068 shares of Class A common stock and 2,542 shares of Class B common stock outstanding on February 18, 2022.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Part III of this Form 10-K (Items 10, 11, 12, 13, and 14) are incorporated by reference to the information statement on Schedule 14C to be
filed with the Securities and Exchange Commission no later than 120 days after December 31, 2021.
INDEX
I Item 1. Business 3
Item 1A. Risk Factors 6
Item 1B. Unresolved Staff Comments 13
Item 2. Properties 13
Item 3. Legal Proceedings 14
Item 4. Mine Safety Disclosures 14
II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities 15
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 36
Item 8. Financial Statements and Supplementary Data 39
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure 75
Item 9A. Controls and Procedures 75
Item 9B. Other Information 75
Signatures 85
2
PART I
ITEM 1. BUSINESS
General
Erie Indemnity Company ("Indemnity", "we", "us", "our") is a publicly held Pennsylvania business corporation that has since
its incorporation in 1925 served as the attorney-in-fact for the subscribers (policyholders) at the Erie Insurance Exchange
("Exchange"). The Exchange, which also commenced business in 1925, is a Pennsylvania-domiciled reciprocal insurer that
writes property and casualty insurance. The Exchange has wholly owned property and casualty subsidiaries including: Erie
Insurance Company, Erie Insurance Company of New York, Erie Insurance Property & Casualty Company and Flagship City
Insurance Company, and a wholly owned life insurance company, Erie Family Life Insurance Company ("EFL").
Our primary function as attorney-in-fact is to perform policy issuance and renewal services on behalf of the subscribers at the
Exchange. We also act as attorney-in-fact on behalf of the Exchange with respect to all claims handling and investment
management services, as well as the service provider for all claims handling, life insurance, and investment management
services for its insurance subsidiaries, collectively referred to as "administrative services". Acting as attorney-in-fact in these
two capacities is done in accordance with a subscriber's agreement (a limited power of attorney) executed individually by each
subscriber (policyholder), which appoints us as their common attorney-in-fact to transact certain business on their behalf.
Pursuant to the subscriber’s agreement for acting as attorney-in-fact in these two capacities, we earn a management fee
calculated as a percentage, not to exceed 25%, of the direct and affiliated assumed premiums written by the Exchange. The
management fee rate is set at least annually by our Board of Directors. The process of setting the management fee rate includes
the evaluation of current year operating results compared to both prior year and industry estimated results for both Indemnity
and the Exchange, and consideration of several factors for both entities including: their relative financial strength and capital
position; projected revenue, expense and earnings for the subsequent year; future capital needs; as well as competitive position.
Services
The policy issuance and renewal services we provide to the Exchange are related to the sales, underwriting and issuance of
policies. The sales related services we provide include agent compensation and certain sales and advertising support services.
Agent compensation includes scheduled commissions to agents based upon premiums written as well as additional
commissions and bonuses to agents, which are earned by achieving targeted measures. Agent compensation comprised
approximately 66% of our 2021 policy issuance and renewal expenses. The underwriting services we provide include
underwriting and policy processing and comprised approximately 10% of our 2021 policy issuance and renewal expenses. The
remaining services we provide include customer service and administrative support. We also provide information technology
services that support all the functions listed above that comprised approximately 11% of our 2021 policy issuance and renewal
expenses. Included in these expenses are allocations of costs for departments that support these policy issuance and renewal
functions.
By virtue of its legal structure as a reciprocal insurer, the Exchange does not have any employees or officers. Therefore, it
enters into contractual relationships by and through an attorney-in-fact. Indemnity serves as the attorney-in-fact on behalf of
the Exchange with respect to its administrative services. The Exchange's insurance subsidiaries also utilize Indemnity for these
services in accordance with the service agreements between each of the subsidiaries and Indemnity. Claims handling services
include costs incurred in the claims process, including the adjustment, investigation, defense, recording and payment functions.
Life insurance management services include costs incurred in the management and processing of life insurance business.
Investment management services are related to investment trading activity, accounting and all other functions attributable to the
investment of funds. Included in these expenses are allocations of costs for departments that support these administrative
functions. The amounts incurred for these services are reimbursed to Indemnity at cost in accordance with the subscriber's
agreement and the service agreements. State insurance regulations require that intercompany service agreements and any
material amendments be approved in advance by the state insurance department.
Erie Insurance Exchange
As our primary purpose is to manage the affairs at the Exchange for the benefit of the subscribers (policyholders) through the
policy issuance and renewal services and administrative services, the Exchange is our sole customer. Our earnings are largely
generated from management fees based on the direct and affiliated assumed premiums written by the Exchange. We have no
direct competition in providing these services to the Exchange.
The Exchange generates revenue by insuring preferred and standard risks, with personal lines comprising 70% of the 2021
direct and affiliated assumed written premiums and commercial lines comprising the remaining 30%. The principal personal
lines products are private passenger automobile and homeowners. The principal commercial lines products are commercial
multi-peril, commercial automobile and workers compensation. Historically, due to policy renewal and sales patterns, the
Exchange's direct and affiliated assumed written premiums are greater in the second and third quarters than in the first and
fourth quarters of the calendar year.
3
The Exchange is represented by independent agencies that serve as its sole distribution channel. In addition to their principal
role as salespersons, the independent agents play a significant role as underwriting and service providers and are an integral part
of the Exchange's success.
Our results of operations are tied to the growth and financial condition of the Exchange. If any events occurred that impaired
the Exchange's ability to grow or sustain its financial condition, including but not limited to reduced financial strength ratings,
disruption in the independent agency relationships, significant catastrophe losses, or products not meeting customer demands,
the Exchange could find it more difficult to retain its existing business and attract new business. A decline in the business of
the Exchange almost certainly would have as a consequence a decline in the total premiums paid and a correspondingly adverse
effect on the amount of the management fees we receive. We also have an exposure to a concentration of credit risk related to
the unsecured receivables due from the Exchange for its management fee and cost reimbursements. See Part II, Item 8.
"Financial Statements and Supplementary Data - Note 15, Concentrations of Credit Risk, of Notes to Financial Statements"
contained within this report. See the risk factors related to our dependency on the growth and financial condition of the
Exchange in Item 1A. "Risk Factors" contained within this report.
Competition
Our primary function as attorney-in-fact is to perform policy issuance and renewal services on behalf of the subscribers at the
Exchange. We also act as attorney-in-fact on behalf of the Exchange, as well as the service provider for its insurance
subsidiaries, with respect to all administrative services. There are a limited number of companies that provide services under a
reciprocal insurance exchange structure. We do not directly compete against other such companies, given we are appointed by
the subscribers at the Exchange to provide these services.
The direct and affiliated assumed premiums written by the Exchange drive our management fee which is our primary source of
revenue. The property and casualty insurance industry is highly competitive. Property and casualty insurers generally compete
on the basis of customer service, price, consumer recognition, coverages offered, claims handling, financial stability and
geographic coverage. Vigorous competition, particularly in the personal lines automobile and homeowners lines of business, is
provided by large, well-capitalized national companies, some of which have broad distribution networks of employed or captive
agents, by smaller regional insurers, and by large companies who market and sell personal lines products directly to consumers.
Innovations by competitors or other market participants may also increase the level of competition in the industry. In addition,
because the insurance products of the Exchange are marketed exclusively through independent insurance agents, the Exchange
faces competition within its appointed agencies based upon ease of doing business, product, price, and service
relationships.
Market competition bears directly on the price charged for insurance products and services subject to regulatory limitations.
Industry capital levels can also significantly affect prices charged for coverage. Growth is driven by a company's ability to
provide insurance services and competitive prices while maintaining target profit margins. Growth is a product of a company's
ability to retain existing customers and to attract new customers, as well as movement in the average premium per policy.
The Exchange's business model is designed to provide the advantages of localized marketing and claims servicing with the
economies of scale and low cost of operations from centralized support services. The Exchange also carefully selects the
independent agencies that represent it and seeks to be the lead insurer with its agents in order to enhance the agency relationship
and the likelihood of receiving the most desirable underwriting opportunities from its agents.
The Exchange’s strategic focus as a reciprocal insurer is to employ a disciplined underwriting philosophy and to leverage its
strong surplus position to generate higher risk adjusted investment returns. The goal is to produce acceptable returns, on a long-
term basis, through careful risk selection, rational pricing and superior investment returns. This focus allows the Exchange to
accomplish its mission of providing as near perfect protection, as near perfect service as is humanly possible at the lowest
possible costs.
See the risk factors related to our dependency on the growth and financial condition of the Exchange in Item 1A. "Risk Factors"
contained within this report for further discussion on competition in the insurance industry.
4
Human Capital Management
Our success is largely dependent upon our ability to attract, retain, and develop diverse talent while maintaining our service-
based culture. We strive to create a value proposition for our employees through trust and collaboration while providing
competitive compensation, benefits, and other reward programs. Our low turnover and high tenure are reflective of our culture
and the mutual commitment that exists between employees and the company.
Our human capital management strategy, including initiatives to shape our workforce and workplace, is designed to ensure we
are well positioned for the future. Areas of focus include talent acquisition, performance management, succession planning,
learning and development, and diversity and inclusion. Our investments in human capital include comprehensive total rewards
and programs aimed at developing our employees to be successful in their current and future roles. We hold a shared
responsibility view of retirement planning whereby the company provides tools and resources that employees are expected to
use to achieve their retirement goals. We set ourselves apart by offering both a 401(k) plan and a noncontributory defined
benefit pension plan.
We use the following human capital metrics as part of managing our business:
Years ended December 31,
2021 2020 2019
Workforce size
Full-time (1) 5,805 5,849 5,772
Part-time 30 31 41
Temporary (2) 41 34 32
Turnover (3) 8.0 % 5.3 % 5.6 %
Average tenure (4) 12.6 12.5 12.3
(1) Includes 50% of employees who provide claims and life insurance management services exclusively for the Exchange and its subsidiaries. The
Exchange and its subsidiaries reimburse us monthly for the cost of these services.
(2) Temporary employees are hired for short-term work and paid directly by us.
(3) The percentage of employees who left voluntarily or involuntarily, including retirements. Calculated using the number of employees who exited,
divided by the average headcount of the period.
(4) The average number of years employees have been employed with the organization. Total number of years divided by average headcount of full-time
and part-time employees for the period.
The tightening labor market during the COVID-19 pandemic has increased competition to attract and retain talent. In 2021, a
large portion of the increase in our turnover can be attributed to voluntary turnover, which increased from 3.0% and 2.4% in
2019 and 2020, respectively, to 4.8% in 2021. ERIE continues to monitor its turnover trends to determine the appropriate
actions to ensure we are well positioned for the future.
As we recognize the importance of employee engagement on the outcomes we achieve as an organization, we also work with
independent external partners to administer confidential surveys to collect feedback on the employee experience. We have
partnered with the Great Place to Work® ("GPTW") Institute since 2012. We received the honor of being Great Place to Work-
Certified™ in 2020 and 2017, and Great-rated in 2014. Our overall GPTW score has trended upwards over the last three
surveys and is favorable compared to the benchmark of the companies ranked on the Great Place to Work® Top 100
Companies List. Since our last full survey in 2020, we have conducted several employee pulse surveys to continue to monitor
employee engagement.
5
Government Regulation
Most states have enacted legislation that regulates insurance holding company systems, defined as two or more affiliated
persons, one or more of which is an insurer. Indemnity and the Exchange, and its wholly owned subsidiaries, meet the
definition of an insurance holding company system.
Each insurance company in the holding company system is required to register with the insurance supervisory authority of its
state of domicile and furnish information regarding the operations of companies within the holding company system that may
materially affect the operations, management, or financial condition of the insurers within the system. Pursuant to these laws,
the respective insurance departments may examine us and the Exchange and its wholly owned subsidiaries at any time, and may
require disclosure and/or prior approval of certain transactions with the insurers and us, as an insurance holding company.
All transactions within a holding company system affecting the member insurers of the holding company system must be fair
and reasonable and any charges or fees for services performed must be reasonable. Approval by the applicable insurance
commissioner is required prior to the consummation of transactions affecting the members within a holding company system.
Website Access
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those
reports are available free of charge on our website at www.erieinsurance.com as soon as reasonably practicable after such
material is filed electronically with the Securities and Exchange Commission. Additionally, copies of our annual report on
Form 10-K are available free of charge, upon written request, by contacting Investor Relations, Erie Indemnity Company,
100 Erie Insurance Place, Erie, PA 16530, or calling (800) 458-0811.
Our business involves various risks and uncertainties, including, but not limited to those discussed in this section. The risks and
uncertainties described in the risk factors below, or any additional risk outside of those discussed below, could have a material
adverse effect on our business, financial condition, operating results, cash flows, or liquidity if they were to develop into actual
events. This information should be considered carefully together with the other information contained in this report and in
other reports and materials we file periodically with the Securities and Exchange Commission.
Risks related to Erie Insurance Exchange – risks related to our dependence on our relationship with the Exchange associated
with management fees, premium growth, and financial condition, as the Exchange is our sole customer and principal source of
revenue
Operating risks – risks stemming from events or circumstances that directly or indirectly affect our operations, including our
operations as attorney-in-fact for the Exchange
Market, Capital, and Liquidity risks – risks that may impact the values or results of our investment portfolio, ability to meet
financial obligations or covenants, or obtain capital as necessary
Although we have organized risks generally according to these categories in the discussion below, risks may have impacts in
more than one category and are included where the impact is most significant.
If the management fee rate paid by the Exchange is reduced or if there is a significant decrease in the amount of direct and
affiliated assumed premiums written by the Exchange, revenues and profitability could be materially adversely affected.
We are dependent upon management fees paid by the Exchange, which represent our principal source of revenue. Pursuant to
the subscriber's agreement with the subscribers at the Exchange, we may retain up to 25% of all direct and affiliated assumed
premiums written by the Exchange. Therefore, management fee revenue from the Exchange is calculated by multiplying the
management fee rate by the direct and affiliated assumed premiums written by the Exchange. Accordingly, any reduction in
direct and affiliated assumed premiums written by the Exchange and/or the management fee rate would have a negative effect
on our revenues and net income.
6
The management fee rate is determined by our Board of Directors and may not exceed 25% of the direct and affiliated assumed
premiums written by the Exchange. The Board of Directors sets the management fee rate each December for the following
year. At their discretion, the rate can be changed at any time. The process of setting the management fee rate includes the
evaluation of current year operating results compared to both prior year and industry estimated results for both Indemnity and
the Exchange, and consideration of several factors for both entities including: their relative financial strength and capital
position; projected revenue, expense and earnings for the subsequent year; future capital needs; as well as competitive position.
The evaluation of these factors could result in a reduction to the management fee rate and our revenues and profitability could
be materially adversely affected.
Serving as the attorney-in-fact in the reciprocal insurance exchange structure results in the Exchange being our sole customer.
We have an interest in the growth of the Exchange as our earnings are largely generated from management fees based on the
direct and affiliated assumed premiums written by the Exchange. If the Exchange's ability to grow or renew policies were
adversely impacted, the premium revenue of the Exchange would be adversely affected which would reduce our management
fee revenue. The circumstances or events that might impair the Exchange's ability to grow include, but are not limited to, the
items discussed below.
Unfavorable changes in macroeconomic conditions for any reason, including declining consumer confidence, inflation, high
unemployment, lower demand for certain services, reduced personal income, and recession, among others, may lead the
Exchange's customers to modify coverage, not renew policies, or even cancel policies, which could adversely affect the
premium revenue of the Exchange, and consequently our management fee.
The Exchange faces significant competition from other regional and national insurance companies. The property and casualty
insurance industry is highly competitive on the basis of product, price and service. If the Exchange's competitors offer property
and casualty products with more coverage or offer lower rates, and the Exchange is unable to implement product improvements
quickly enough to keep pace, its ability to grow and renew its business may be adversely impacted. In addition, due to the
Exchange's premium concentration in the automobile and homeowners insurance markets, it may be more sensitive to trends
that could affect auto and home insurance coverages and rates over time, for example changing vehicle usage, usage-based
methods of determining premiums, ownership and driving patterns such as ride sharing or remote work, advancements in
vehicle or home technology or safety features such as accident and loss prevention technologies, the development of
autonomous vehicles, or residential occupancy patterns, among other factors. Innovations by competitors or other market
participants may increase the level of competition in the industry. If the Exchange fails to respond to those innovations on a
timely basis, its competitive position and results may be materially adversely affected.
The Exchange markets and sells its insurance products through independent, non-exclusive insurance agencies. These agencies
are not obligated to sell only the Exchange's insurance products, and generally also sell products of the Exchange's competitors.
If agencies do not maintain their current levels of marketing efforts, bind the Exchange to unacceptable risks, or place business
with competing insurers, or if the Exchange is unsuccessful in attracting or retaining agencies in its distribution system or
maintaining its relationships with those agencies, the Exchange's ability to grow and renew its business may be adversely
impacted. More broadly, if independent agents face challenges sustaining their own business operations due to unfavorable
economic conditions, it could result in the sale or closure of their businesses, thereby reducing the agency force of the
Exchange. Additionally, shifting consumer behaviors toward increased digital interactions may cause the insurance industry as
a whole to migrate to a delivery system other than independent agencies.
The Exchange maintains a brand recognized for customer service. The perceived performance, actions, conduct and behaviors
of employees, independent insurance agency representatives, and third-party service partners may result in reputational harm to
the Exchange's brand. Specific incidents which may cause harm include but are not limited to disputes, long customer wait
times, errors in processing a claim, failure to protect sensitive customer data, and negative or inaccurate social media or
traditional media communications. Likewise, an inability to match or exceed the service provided by competitors, which is
increasingly relying on digital delivery and enhanced distribution technology, may impede the Exchange's ability to maintain
and/or grow its customer base. If third-party service providers fail to perform as anticipated, the Exchange may experience
operational difficulties, increased costs and reputational damage. If an extreme catastrophic event were to occur in a heavily
concentrated geographic area of subscribers/policyholders, an extraordinarily high number of claims could have the potential to
strain claims processing and affect the Exchange's ability to satisfy its customers. Also, we, or the Exchange, may fail to meet
environmental, social, and governance (ESG) expectations of our customers or other interested parties. Failure to satisfy
expectations in these areas may result in negative publicity or other adverse outcomes. Any reputational harm to the Exchange
could have the potential to impair its ability to grow and renew its business.
7
We have an interest in the financial condition of the Exchange based on serving as the attorney-in-fact in the reciprocal
insurance exchange structure and the Exchange being our sole customer. If the Exchange were to fail to maintain acceptable
financial strength ratings, its competitive position in the insurance industry would be adversely affected. If a rating downgrade
led to customers not renewing or canceling policies, or impacted the Exchange's ability to attract new customers, the premium
revenue of the Exchange would be adversely affected which would reduce our management fee revenue. The circumstances or
events that might impair the Exchange's financial condition include, but are not limited to, the items discussed below.
Financial strength ratings are an important factor in establishing the competitive position of insurance companies such as the
Exchange. Higher ratings generally indicate greater financial stability and a stronger ability to meet ongoing obligations to
policyholders. The Exchange's A.M. Best rating is currently A+ ("Superior"). A.M. Best periodically reviews the Exchange’s
ratings and changes their rating criteria; therefore, the Exchange's current rating may not be maintained in the future. A
significant downgrade in the A.M. Best rating could reduce the competitive position of the Exchange, making it more difficult
to attract profitable business in the highly competitive property and casualty insurance market and potentially result in reduced
sales of its products and lower premium revenue.
The performance of the Exchange's investment portfolio is subject to a variety of investment risks. The Exchange's investment
portfolio is comprised principally of fixed income securities, equity securities and limited partnerships. The fixed income
portfolio is subject to a number of risks including, but not limited to, interest rate risk, investment credit risk,
sector/concentration risk and liquidity risk. The Exchange's common stock and preferred equity securities have exposure to
price risk, the risk of potential loss in estimated fair value resulting from an adverse change in prices. Limited partnerships are
significantly less liquid and generally involve higher degrees of price risk than publicly traded securities. Limited partnerships,
like publicly traded securities, have exposure to market volatility; but unlike fixed income securities, cash flows and return
expectations are less predictable. If any investments in the Exchange's investment portfolio were to suffer a substantial
decrease in value, the Exchange's financial position could be materially adversely affected through increased unrealized losses
or impairments. A significant decrease in the Exchange's portfolio could also put it, or its subsidiaries, at risk of failing to
satisfy regulatory or rating agency minimum capital requirements.
Property and casualty insurers are subject to extensive regulatory supervision in the states in which they do business. This
regulatory oversight includes, by way of example, matters relating to licensing, examination, rate setting, market conduct,
policy forms, limitations on the nature and amount of certain investments, claims practices, mandated participation in
involuntary markets and guaranty funds, reserve adequacy, insurer solvency, restrictions on underwriting standards, accounting
standards, and transactions between affiliates. Such regulation and supervision are primarily for the benefit and protection of
policyholders. Changes in applicable insurance laws, tax statutes, regulations, or changes in the way regulators administer
those laws, tax statutes, or regulations could adversely impact the Exchange's business, cash flows, results of operations,
financial condition, or operating environment and increase its exposure to loss or put it at a competitive disadvantage, which
could result in reduced sales of its products and lower premium revenue.
Property and casualty insurers face a significant risk of litigation and regulatory investigations and actions in the ordinary
course of operating their businesses including the risk of class action lawsuits. The Exchange and its subsidiaries have also
been named as defendants in a number of pandemic-related lawsuits and, therefore, are subject to the risks and uncertainties of
such litigation. Plaintiffs in class action and other lawsuits against the Exchange may seek large or indeterminate amounts of
damages, including punitive and treble damages, which may remain unknown for substantial periods of time. The Exchange is
also subject to various regulatory inquiries, such as information requests, subpoenas, and books and record examinations from
state and federal regulators and authorities.
The uncertainty of risks that emerge upon the occurrence of significant unexpected events, such as pandemics, may cause
additional challenges in the process of estimating loss and loss adjustment expense reserves. For example, the behavior of
claimants and policyholders may change in unexpected ways, the disruption to the court system may impact the timing and
amounts of claims settlements, and the actions taken by governmental bodies, both legislative and regulatory, in reaction to a
pandemic or other significant unexpected events, and their related impacts, are hard to predict. Among other things, this may
result in changes to the Exchange's estimated level of loss and loss adjustment expense reserves.
As insurance industry practices and legal, judicial, social and other environmental conditions change, unexpected and
unintended issues related to claims and coverage may emerge. In some instances, these emerging issues may not become
apparent for some time after the Exchange has issued the affected insurance policies. As a result, the full extent of liability
under the Exchange's insurance policies may not be known for many years after the policies are issued. These issues may
adversely affect the Exchange's business by either extending coverage beyond its underwriting intent or by increasing the
number or size of claims. If there were legislative action in response to a pandemic or other significant unexpected event that
retroactively mandated coverage irrespective of terms, exclusions or other conditions included in policies, such as business
interruption, that would otherwise preclude coverage, it could have a material impact on the financial condition, results of
operations and cash flows of the Exchange.
8
The Exchange's insurance operations are exposed to claims arising out of catastrophes. Common natural catastrophic events
include hurricanes, earthquakes, tornadoes, hail storms, and severe winter weather. The frequency and severity of these
catastrophes is inherently unpredictable. Changing climate conditions have added to the unpredictability, frequency and
severity of natural disasters and have created additional uncertainty as to future trends and exposures. A single catastrophic
occurrence or aggregation of multiple smaller occurrences within the geographical region of the Exchange or its assumed
property reinsurance portfolio could adversely affect the financial condition of the Exchange. Man-made disasters such as
terrorist attacks and riots could also cause losses from insurance claims related to the property and casualty insurance
operations, which could adversely affect its financial condition.
Operating risks
If the costs of providing services to the Exchange are not controlled, our profitability could be materially adversely affected.
Pursuant to the subscriber's agreement, we perform policy issuance and renewal services for the subscribers at the Exchange
and we serve as the attorney-in-fact on behalf of the Exchange with respect to its administrative services. The most significant
costs we incur in providing policy issuance and renewal services are commissions, employee costs, and technology costs.
Commissions to independent agents are our largest expense. Commissions include scheduled commissions to agents based
upon premiums written as well as additional commissions and bonuses to agents, which are earned by achieving certain
targeted measures. Changes to commission rates or bonus programs may result in increased future costs and lower profitability.
Our agent incentive bonuses include a profitability component. If claims frequency and loss expenses were to decrease
significantly as a result of an unexpected event, such as a pandemic, the profitability component of our agent incentive bonuses
would improve, and our agent compensation costs would increase. Our second largest expense is employee costs, including
salaries, healthcare, pension, and other benefit costs. Regulatory developments, provider relationships, pandemics and
demographic and economic factors that are beyond our control indicate that employee healthcare costs could continue to
increase which could reduce our profitability. The defined benefit pension plan we offer to our employees is affected by
variable factors such as the interest rate used to discount pension liabilities, asset performance and changes in retirement
patterns, which are beyond our control and any related future costs increases would reduce our profitability.
Technological development is necessary to facilitate ease of doing business for employees, agents and customers. Our
technological developments are focused on simplifying and improving the employee, agent and customer experiences,
increasing efficiencies, redesigning products and addressing other potentially disruptive changes in the insurance industry. As
we continue to develop technology initiatives in order to remain competitive, our profitability could be negatively impacted as
we invest in system development. We may also experience increased technology costs as we re-design hybrid work models for
our employees.
If we are unable to attract, develop, and retain talented executives, key managers, and employees our financial conditions and
results of operations could be adversely affected.
Our success is largely dependent upon our ability to attract and retain talented executives and other key management. Talent is
defined as people with the right skills, knowledge, abilities, character, and motivation. The loss of the services and leadership
of certain key officers and the failure to plan for turnover or retirement or to attract and develop talented new executives and
managers could prevent us from successfully communicating, implementing, and executing business strategies.
Our success also depends on our ability to attract, develop, and retain a talented employee base. The inability to staff all
functions of our business with employees possessing the appropriate talent or failure to instill appropriate cultural expectations
and behavioral norms within our employees could have an adverse effect on our business performance. Additionally, failure to
recognize, evaluate, and respond to changing workforce trends including current labor market conditions and new ways of
managing in hybrid work environments, or failure to execute proactive retention and replacement strategies could also have an
adverse effect on our business performance. Staffing appropriately talented employees for the handling of claims and servicing
of customers, rendering of disciplined underwriting, and effective sales and marketing are critical to the core functions of our
business. In addition, talented employees in the actuarial, finance, human resources, information technology, law, and risk
management areas are also essential to support our core functions.
9
If we are unable to ensure system availability or effectively manage technology initiatives, we may experience adverse financial
consequences and/or may be unable to compete effectively.
Our business is highly dependent upon the effectiveness of our technology and information systems which support key
functions of our core business operations including processing applications and premium payments, providing customer
support, performing actuarial and financial analysis, and maintaining key data. Additionally, the Exchange relies heavily on
technology systems for processing claims. In order to support our business processes and strategic initiatives in a cost and
resource efficient manner, we must maintain the effectiveness of existing technology systems and continue to identify and
develop new, and enhance existing, technology systems. As we invest in the development of our systems, costs and completion
times could exceed original estimates, and/or the project may not deliver the anticipated benefit or perform as expected. If we
do not effectively and efficiently manage and upgrade our technology systems, our ability to serve our customers and
implement our strategic initiatives could be adversely impacted.
Additionally, we depend on a large amount of data to price policies appropriately, track exposures, perform financial analysis,
report to regulatory bodies, and ultimately make business decisions. Should this data be inaccurate or insufficient, risk
exposure may be underestimated and/or poor business decisions may be made. This may in turn lead to adverse operational or
financial performance and adverse customer or investor confidence.
If we experience difficulties with technology, data and network security, including as a result of cyber attacks, third-party
relationships or cloud-based relationships, our ability to conduct our business could be adversely impacted.
In the normal course of business, we collect, use, store and where appropriate, disclose data concerning individuals and
businesses. We also conduct business using third parties who may provide software, data storage, cloud-based computing and
other technology services. We have on occasion experienced, and will continue to experience, cyber threats to our data and
systems. Cyber threats can create significant risks such as destruction of systems or data, denial or interruption of service,
disruption of transaction execution, loss or exposure of customer data, theft or exposure of our intellectual property, theft of
funds or disruption of other important business functions. Our interactions with third parties may expose us to increased risk
related to data security, service disruptions or effectiveness of our control system.
In addition, we are subject to numerous federal and state data privacy laws relating to the privacy of the nonpublic personal
information of our customers, employees and others. The improper access, disclosure, or misuse or mishandling of information
sent to or received from a customer, employee or third party could result in legal liability, regulatory action and reputational
damage. Third parties on whom we rely for certain business processing functions are also subject to these risks, and their
failure to adhere to these laws and regulations could negatively impact us.
Our Board of Directors oversees our activities with respect to managing cyber risk through its Risk Committee. Management
regularly reports on our cybersecurity risk management program including our risk evaluation and the results of independent
third-party security assessments, and our efforts to manage cyber related risks.
We employ a company-wide cybersecurity program of technical, administrative, physical and disclosure controls intended to
reduce the risk of cyber threats and protect our information, as well as to communicate potential material threats and incidents.
Our cybersecurity philosophy and approach align to the National Institute of Standards and Technology Cybersecurity
Framework and its core elements to identify, protect, detect, respond and recover from the various forms of cyber threats. Our
practices include, but are not limited to, cybersecurity protocols and controls, system monitoring and detection, communication
of incidents to appropriate management, third-party risk management, including assessments of emerging threats and
vulnerabilities, and ongoing privacy and cybersecurity training for employees and contractors concerning cyber risk. We
periodically assess the effectiveness of our cybersecurity efforts including independent validation and verification and security
assessments conducted by independent third parties.
The number, complexity and sophistication of cyber threats continue to increase over time. While we maintain cyber liability
insurance to mitigate the financial risk around cyber incidents, such insurance may not cover all costs associated with the
consequences of information or systems being compromised. Additionally, while we have dedicated resources with security
incident response capabilities, our response process may not be adequate, may fail to accurately assess the severity of an
incident, may not respond quickly enough or may fail to sufficiently remediate an incident. As a result, we may suffer
significant legal, reputational, or financial losses, which could adversely affect our business, cash flows, financial condition or
results of operations.
10
To date, we are not aware of any material cybersecurity breach with respect to our systems or data. Additionally, we are not
aware of any cybersecurity breach experienced by anyone with whom we have a third-party relationship that has had a material
impact on our systems or data.
If events occurred causing interruption of our operations, facilities, systems or business functions, it could have a material
adverse effect on our operations and financial results.
We have established business continuity and disaster recovery plans to ensure the continuation of core business operations in
the event that normal business operations could not be performed due to catastrophic or other events, including pandemics.
While we continue to test and assess our business continuity and disaster recovery plans to validate they meet the needs of our
core business operations and addresses multiple business interruption events, there is no assurance that core business operations
could be performed upon the occurrence of such an event. Employee absence, physical premises damage, systems failures or
outages could compromise our ability to perform our business functions in a timely manner, which could harm our ability to
conduct business and hurt our relationships with our business partners and customers. Our operational resiliency is also
dependent on third-party personnel, infrastructure and systems on which we rely. Our operations and those of our third parties
may become vulnerable to damage or disruption due to circumstances beyond our or their control, such as from catastrophic
events, power anomalies or outages, natural disasters, pandemics, supply chain interruptions, network failures, and cyber
attacks. Additionally, we are more dependent on internet and telecommunications access and capabilities. Indemnity’s
workforce is largely concentrated in Erie, Pennsylvania. If a significant event affects the labor force in this area, it could impact
the policy acquisition, underwriting, claims and/or support services provided to the policyholders and/or independent agents of
the Exchange. Disruptions to our workforce or our operations for any reason could result in a material adverse effect on our
business, cash flows, financial condition, or results of operations.
We are subject to applicable insurance laws, tax statutes, and regulations, as well as claims and legal proceedings, which, if
determined unfavorably, could have a material adverse effect on our business, results of operations, or financial condition.
We face a significant risk of litigation and regulatory investigations and actions in the ordinary course of operating our
businesses including the risk of class action lawsuits. We are, have been, or may become subject to class actions and individual
suits alleging breach of fiduciary or other duties, including our obligations to indemnify directors and officers in connection
with certain legal matters. We are also subject to litigation arising out of our general business activities such as contractual and
employment relationships and claims regarding the infringement of the intellectual property of others. Plaintiffs in class action
and other lawsuits against us may seek large or indeterminate amounts of damages, including punitive and treble damages,
which may remain unknown for substantial periods of time. We are also subject to various regulatory inquiries, such as
information requests, subpoenas, and books and record examinations from state and federal regulators and authorities. In
addition, changes in the way regulators administer applicable laws, tax statutes, or regulations could adversely impact our
business, cash flows, results of operations, or financial condition. It is also possible that changes in economic conditions and
steps taken by federal, state and local governments in response to a pandemic or other significant events could cause an increase
in taxes at the federal, state and local levels, which would adversely impact our results of operations.
The performance of our investment portfolio is subject to a variety of investment risks, which may in turn have a material
adverse effect on our results of operations or financial condition.
At December 31, 2021, our investment portfolio consisted of approximately 83% fixed maturity securities, with the remaining
17% invested in equity securities and other investments.
General economic conditions and other factors beyond our control can adversely affect the value of our investments and the
realization of net investment income, or result in realized investment losses. In addition, downward economic trends also may
have an adverse effect on our investment results by negatively impacting the business conditions and impairing credit for the
issuers of securities held in our respective investment portfolios. This could reduce fair values of investments and generate
significant unrealized losses or impairment charges which may adversely affect our financial results.
The performance of the fixed income portfolio is subject to a number of risks including, but not limited to:
• Interest rate risk - the risk of adverse changes in the value of fixed income securities as a result of increases in
market interest rates.
11
• Investment credit risk - the risk that the value of certain investments may decrease due to the deterioration in
financial condition of, or the liquidity available to, one or more issuers of those securities or, in the case of
structured securities, due to the deterioration of the loans or other assets that underlie the securities, which, in each
case, also includes the risk of permanent loss.
• Sector/Concentration risk - the risk that the portfolio may be too heavily concentrated in the securities of one or
more issuers, sectors, or industries. Events or developments that have a negative impact on any particular
industry, group of related industries, or geographic region may have a greater adverse effect on our investment
portfolio to the extent that the portfolio is concentrated within those issuers, sectors, or industries.
• Liquidity risk - the risk that we will not be able to convert investment securities into cash on favorable terms and
on a timely basis, or that we will not be able to sell them at all, when desired. Disruptions in the financial markets
or a lack of buyers for the specific securities that we are trying to sell, could prevent us from liquidating securities
or cause a reduction in prices to levels that are not acceptable to us.
• Reinvestment risk - the possibility that the cash flows produced by an investment will have to be reinvested at a
reduced rate of return. Approximately 42% of our fixed maturity portfolio is expected to mature over the next
three years.
Our equity securities have exposure to price risk. Equity markets, sectors, industries, and individual securities may also be
subject to some of the same risks that affect our fixed income portfolio, as discussed above.
All of our fixed income and equity securities are subject to market volatility. To the extent that future market volatility
negatively impacts our investments, our financial condition will be negatively impacted. We review the fixed income portfolio
on a continuous basis to evaluate positions that are in an unrealized loss position to determine whether impairments are a result
of credit loss or other factors. Inherent in management's evaluation of a security are assumptions and estimates about the
operations of the issuer and its future earnings potential. The primary factors considered in our review of investment valuation
include the extent to which fair value is less than cost, historical operating performance and financial condition of the issuer,
short- and long-term prospects of the issuer and its industry, specific events that occurred affecting the issuer, including rating
downgrades, and, depending on the type of security, our intent to sell or our ability and intent to retain the investment for a
period of time sufficient to allow for a recovery in value. As the process for determining impairments is highly subjective,
changes in our assessments may have a material effect on our operating results and financial condition. See also Part II, Item
7A. "Quantitative and Qualitative Disclosures about Market Risk".
In July 2017, the United Kingdom’s Financial Conduct Authority ("FCA"), which regulates the London Interbank Offered Rate
(“LIBOR”), announced that it intends to phase out LIBOR by the end of 2021. After this date, the FCA would no longer
require banks to make LIBOR submissions. Following discussions with the FCA and other official sector bodies, the
Intercontinental Exchange Benchmark Administration announced in March 2021 the publication of certain USD LIBOR
settings will continue through June 30, 2023. The Alternative Reference Rates Committee of the Federal Reserve Board
(ARRC), a group of market participants convened to help ensure a successful transition away from LIBOR, has recommended
the Secured Overnight Financing Rate (SOFR) as its preferred alternative reference rate and has proposed a transition plan and
timeline designed to encourage the adoption of SOFR from LIBOR. Volume in SOFR-linked products has increased
significantly during 2021; however, LIBOR continues to be the dominant reference rate in use in the market today.
We have identified our population of contracts that contain a LIBOR reference and have determined that our primary exposure
is in fixed income securities within our investment portfolio. Approximately 23% of our investment portfolio includes securities
with LIBOR exposure where the stated final maturity date extends beyond June 30, 2023. Many of our LIBOR indexed
securities have fallback provisions that provide for an alternative reference rate when LIBOR ceases to exist. For securities
without adequate fallback provisions already in place, legislation governing securities under New York law has been enacted to
provide a safe harbor for transition to the recommended alternative reference rate. In addition, federal legislation has been
introduced to provide the same protection for securities not governed by New York law.
While our preliminary analysis does not indicate that the transition of our investments to alternative reference rates will result in
adverse changes to the net investment income, fair market value and return on those investments, we are still in the process of
evaluation. We continually monitor the risks associated with the LIBOR transition which include identifying and monitoring
our exposure to LIBOR, monitoring the market adoption of alternative reference rates and ensuring operational processes are
updated to accommodate alternative rates. Due to uncertainty surrounding alternative rates, we are unable to predict the
overall impact of this change at this time.
12
Deteriorating capital and credit market conditions or a failure to accurately estimate capital needs may significantly affect our
ability to meet liquidity needs and access capital.
Sufficient liquidity and capital levels are required to pay operating expenses, income taxes, and to provide the necessary
resources to fund future growth opportunities, satisfy certain financial covenants, pay dividends on common stock, and
repurchase common stock. Management estimates the appropriate level of capital necessary based upon current and projected
results, which includes evaluating potential risks. Failure to accurately estimate our capital needs may have a material adverse
effect on our financial condition until additional sources of capital can be obtained. Further, a deteriorating financial condition
may create a negative perception of us by third parties, including investors, and financial institutions, which could impact our
ability to access additional capital in the debt or equity markets.
Our primary sources of liquidity are management fee revenue and cash flows generated from our investment portfolio. In the
event our current sources do not satisfy our liquidity needs, we have the ability to access our $100 million bank revolving line
of credit, from which there were no borrowings as of December 31, 2021, or liquidate assets in our investment portfolio.
Volatility in the financial markets could limit our ability to sell certain fixed income securities or cause such investments to sell
at deep discounts.
In the event these traditional sources of liquidity are not available, we may have to seek additional financing. Our access to
funds will depend upon a number of factors including current market conditions, the availability of credit, market liquidity, and
the timing of obtaining credit ratings. In deteriorating market conditions, there can be no assurance that we will obtain
additional financing, or, if available, that the cost of financing will not substantially increase and affect our overall profitability.
None.
ITEM 2. PROPERTIES
Indemnity and the Exchange share a corporate home office campus in Erie, Pennsylvania, which comprises approximately
996,000 square feet. Additionally, we lease two office buildings and one warehouse facility from third parties. We are charged
rent for the related square footage we occupy.
Indemnity and the Exchange also operate 25 field offices in 12 states to perform primarily claims-related activities. The
Exchange owns seven field offices, Indemnity owns property, a portion of which houses one field office, and leases the
remaining field offices from third parties. Commitments for properties leased from other parties expire periodically through
2027. We expect that most leases will be renewed or replaced upon expiration. Rental costs of shared facilities are allocated
based upon usage or square footage occupied.
Due to the uncertainty of the COVID-19 pandemic, approximately 90% of our workforce has been working remote since March
2020. We have a dedicated team responsible for the development and implementation of a return to office plan. We began
returning some employees to our offices in July 2021, but paused as a result of the national increase in infections. We plan to
resume returning employees to our offices in phases when we consider it appropriate.
13
ITEM 3. LEGAL PROCEEDINGS
Erie Indemnity Company ("Indemnity") was named as a defendant in a complaint filed on August 24, 2021, by alleged
subscribers of the Erie Insurance Exchange (the "Exchange") in the Court of Common Pleas Civil Division of Allegheny
County, Pennsylvania captioned TROY STEPHENSON, CHRISTINA STEPHENSON, SUSAN RUBEL, and STEVEN
BARNETT, individually and on behalf of all others similarly situated (Plaintiffs) v. Erie Indemnity Company (Defendant).
The complaint seeks relief for alleged breaches of fiduciary duty by Indemnity in connection with the setting of the
management fee it receives, pursuant to the terms of the Subscribers Agreement executed between Indemnity and all
policyholders of the Exchange, as compensation for acting as the attorney-in-fact in the management of the Exchange. The
relief sought is for the period beginning two years prior to the date of the filing of the complaint and continuing through 2021.
The complaint seeks (i) a finding that Indemnity has breached its fiduciary duties; (ii) an award of damages in an amount to be
determined at trial; and (iii) such other relief, including disgorgement of profits or other injunctive relief, that the Court deems
just and proper.
Service of the complaint was effectuated on September 20, 2021. A Notice of Removal to the United States District Court for
the Western District of Pennsylvania was filed on October 20, 2021. On November 2, 2021, Plaintiffs filed a Notice of
Voluntary Dismissal. As a result, the action was dismissed without prejudice.
On December 6, 2021, another Complaint was filed in the Court of Common Pleas of Allegheny County, Pennsylvania
captioned ERIE INSURANCE EXCHANGE, an unincorporated association, by TROY STEPHENSON, CHRISTINA
STEPHENSON, and STEVEN BARNETT, trustees ad litem, and alternatively, ERIE INSURANCE EXCHANGE, by TROY
STEPHENSON, CHRISTINA STEPHENSON, and STEVEN BARNETT, (Plaintiff), v. ERIE INDEMNITY COMPANY,
(Defendant).
This most recent complaint has the same allegation of breach of fiduciary duty by Indemnity in connection with the setting of
the management fee it receives, pursuant to the terms of the Subscribers Agreement executed between Indemnity and all
policyholders of the Exchange, as compensation for acting as the attorney-in-fact in the management of the Exchange.
This most recent complaint seeks the same relief, specifically, (i) a finding that Indemnity has breached its fiduciary duties; (ii)
an award of damages in an amount to be determined at trial; and (iii) such other relief, including disgorgement of profits or
other injunctive relief, that the Court deems just and proper.
A Notice of Removal to the United States District Court for the Western District of Pennsylvania was filed on January 27,
2022. Indemnity intends to vigorously defend against all of the allegations and requests for relief in the complaint.
For additional information on contingencies, see Part II, Item 8. "Financial Statements and Supplementary Data - Note 16,
Commitment and Contingencies, of Notes to Financial Statements".
Not applicable.
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Historically, we have declared and paid cash dividends on a quarterly basis at the discretion of the Board of Directors. The
payment and amount of future dividends on the common stock will be determined by the Board of Directors and will depend
upon, among other things, our operating results, financial condition, cash requirements, and general business conditions at the
time such payment is considered.
Stock Performance
The following graph depicts the cumulative total shareholder return, assuming reinvestment of dividends, for the periods
indicated for our Class A common stock compared to the Standard & Poor's 500 Stock Index and the Standard & Poor's
Supercomposite Insurance Industry Group Index. The Standard & Poor's Supercomposite Insurance Industry Group Index is
made up of 57 constituent members represented by property and casualty insurers, insurance brokers, and life insurers, and is a
capitalization weighted index.
300
275
250
225
200
Dollars
125
100
75
2016 2017 2018 2019 2020 2021
(1) Assumes $100 invested at the close of trading, including reinvestment of dividends, on the last trading day preceding the first day of the fifth
preceding fiscal year, in our Class A common stock, the Standard & Poor's 500 Stock Index, and the Standard & Poor's Supercomposite Insurance
Industry Group Index.
15
Issuer Purchases of Equity Securities
We may purchase shares, from time-to-time, in the open market, through trading plans entered into with one or more brokerage
firms pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, or through privately negotiated transactions. The
purchase of shares is dependent upon prevailing market conditions and alternate uses of capital, and at times and in a manner
that is deemed appropriate.
Our Board of Directors authorized a stock repurchase program effective January 1, 1999, allowing the repurchase of our
outstanding Class A nonvoting common stock. Various approvals for continuation of this program have since been authorized,
with the most recent occurring in 2011 for $150 million, which was authorized with no time limitation. There were no
repurchases of our Class A common stock under this program during the quarter ending December 31, 2021. We had
approximately $17.8 million of repurchase authority remaining under this program, based upon trade date, at both
December 31, 2021 and February 18, 2022.
See Item 8. "Financial Statements and Supplementary Data – Note 12, Capital Stock, of Notes to Financial Statements"
contained within this report for discussion of additional shares purchased outside of this program.
Not applicable.
The following discussion of financial condition and results of operations highlights significant factors influencing Erie
Indemnity Company ("Indemnity", "we", "us", "our"). This discussion should be read in conjunction with the audited financial
statements and related notes and all other items contained within this Annual Report on Form 10-K as these contain important
information helpful in evaluating our financial condition and results of operations.
INDEX
Page Number
Cautionary Statement Regarding Forward-Looking Information 16
Recent Accounting Standards 17
Operating Overview 18
Critical Accounting Estimates 21
Results of Operations 24
Financial Condition 30
Investments 30
Shareholders' Equity 31
Liquidity and Capital Resources 32
Transactions/Agreements with Related Parties 35
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995:
Statements contained herein that are not historical fact are forward-looking statements and, as such, are subject to risks and
uncertainties that could cause actual events and results to differ, perhaps materially, from those discussed herein. Forward-
looking statements relate to future trends, events or results and include, without limitation, statements and assumptions on
which such statements are based that are related to our plans, strategies, objectives, expectations, intentions, and adequacy of
resources. Examples of forward-looking statements are discussions relating to premium and investment income, expenses,
operating results, and compliance with contractual and regulatory requirements. Forward-looking statements are not guarantees
of future performance and involve risks and uncertainties that are difficult to predict. Therefore, actual outcomes and results
may differ materially from what is expressed or forecasted in such forward-looking statements. Among the risks and
16
uncertainties, in addition to those set forth in our filings with the Securities and Exchange Commission, that could cause actual
results and future events to differ from those set forth or contemplated in the forward-looking statements include the following:
• dependence upon our relationship with the Erie Insurance Exchange ("Exchange") and the management fee under the
agreement with the subscribers at the Exchange;
• dependence upon our relationship with the Exchange and the growth of the Exchange, including:
◦ general business and economic conditions;
◦ factors affecting insurance industry competition;
◦ dependence upon the independent agency system; and
◦ ability to maintain our reputation for customer service;
• dependence upon our relationship with the Exchange and the financial condition of the Exchange, including:
◦ the Exchange's ability to maintain acceptable financial strength ratings;
◦ factors affecting the quality and liquidity of the Exchange's investment portfolio;
◦ changes in government regulation of the insurance industry;
◦ litigation and regulatory actions;
◦ emergence of significant unexpected events, including pandemics;
◦ emerging claims and coverage issues in the industry; and
◦ severe weather conditions or other catastrophic losses, including terrorism;
• costs of providing policy issuance and renewal services to the Exchange under the subscriber's agreement;
• ability to attract and retain talented management and employees;
• ability to ensure system availability and effectively manage technology initiatives;
• difficulties with technology or data security breaches, including cyber attacks;
• ability to maintain uninterrupted business operations;
• outcome of pending and potential litigation;
• factors affecting the quality and liquidity of our investment portfolio; and
• our ability to meet liquidity needs and access capital.
A forward-looking statement speaks only as of the date on which it is made and reflects our analysis only as of that date. We
undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information,
future events, changes in assumptions, or otherwise.
See Item 8. "Financial Statements and Supplementary Data - Note 2, Significant Accounting Policies, of Notes to Financial
Statements" contained within this report for a discussion of recently adopted accounting standards and the impact on our
financial statements.
17
OPERATING OVERVIEW
Overview
We are a Pennsylvania business corporation that since 1925 has been the managing attorney-in-fact for the subscribers
(policyholders) at the Exchange, a reciprocal insurer that writes property and casualty insurance. Our primary function as
attorney-in-fact is to perform policy issuance and renewal services on behalf of the subscribers at the Exchange. We also act as
attorney-in-fact on behalf of the Exchange, as well as the service provider for its insurance subsidiaries, with respect to all
administrative services.
The Exchange is a reciprocal insurance exchange, which is an unincorporated association of individuals, partnerships and
corporations that agree to insure one another. Each applicant for insurance to the Exchange signs a subscriber's agreement,
which contains an appointment of Indemnity as their attorney-in-fact to transact the business of the Exchange on their behalf.
Pursuant to the subscriber’s agreement for acting as attorney-in-fact in these two capacities, we earn a management fee.
Management fee revenue is based upon all direct and affiliated assumed premiums written by the Exchange and the
management fee rate, which is not to exceed 25%. Our Board of Directors establishes the management fee rate at least
annually, generally in December for the following year. The process of setting the management fee rate includes the evaluation
of current year operating results compared to both prior year and industry estimated results for both Indemnity and the
Exchange, and consideration of several factors for both entities including: their relative financial strength and capital position;
projected revenue, expense and earnings for the subsequent year; future capital needs; as well as competitive position. The
management fee rate was set at 25% for 2021, 2020 and 2019. Our Board of Directors set the 2022 management fee rate again
at 25%, its maximum level.
Our earnings are primarily driven by the management fee revenue generated for the services we provide to the Exchange. The
policy issuance and renewal services we provide to the Exchange are related to the sales, underwriting and issuance of policies.
The sales related services we provide include agent compensation and certain sales and advertising support services. Agent
compensation includes scheduled commissions to agents based upon premiums written as well as additional commissions and
bonuses to agents, which are earned by achieving targeted measures. Agent compensation comprised approximately 66% of
our 2021 policy issuance and renewal expenses. The underwriting services we provide include underwriting and policy
processing and comprised approximately 10% of our 2021 policy issuance and renewal expenses. The remaining services we
provide include customer service and administrative support. We also provide information technology services that support all
the functions listed above that comprised approximately 11% of our 2021 policy issuance and renewal expenses. Included in
these expenses are allocations of costs for departments that support these policy issuance and renewal functions.
By virtue of its legal structure as a reciprocal insurer, the Exchange does not have any employees or officers. Therefore, it
enters into contractual relationships by and through an attorney-in-fact. Indemnity serves as the attorney-in-fact on behalf of
the Exchange with respect to its administrative services. The Exchange's insurance subsidiaries also utilize Indemnity for these
services in accordance with the service agreements between each of the subsidiaries and Indemnity. Claims handling services
include costs incurred in the claims process, including the adjustment, investigation, defense, recording and payment functions.
Life insurance management services include costs incurred in the management and processing of life insurance business.
Investment management services are related to investment trading activity, accounting and all other functions attributable to the
investment of funds. Included in these expenses are allocations of costs for departments that support these administrative
functions. The amounts incurred for these services are reimbursed to Indemnity at cost in accordance with the subscriber's
agreement and the service agreements. State insurance regulations require that intercompany service agreements and any
material amendments be approved in advance by the state insurance department.
Our results of operations are tied to the growth and financial condition of the Exchange as the Exchange is our sole customer,
and our earnings are largely generated from management fees based on the direct and affiliated assumed premiums written by
the Exchange. The Exchange generates revenue by insuring preferred and standard risks, with personal lines comprising 70%
of the 2021 direct and affiliated assumed written premiums and commercial lines comprising the remaining 30%. The principal
personal lines products are private passenger automobile and homeowners. The principal commercial lines products are
commercial multi-peril, commercial automobile and workers compensation.
We generate investment income from our fixed maturity and equity security portfolios. Our portfolio is managed with the
objective of maximizing after-tax returns on a risk-adjusted basis. We actively evaluate the portfolios for securities in an
unrealized loss position and record impairment write-downs on investments in instances where we have the intent to sell or it's
more likely than not that we would be required to sell the security. Impairments resulting from a credit loss are recognized in
earnings with a corresponding allowance on the balance sheet.
18
Coronavirus ("COVID-19") Pandemic
In March 2020, the outbreak of the coronavirus ("COVID-19") was declared a global pandemic and pandemic conditions have
influenced various economic factors, including a more inflationary environment in recent months. As the uncertainty resulting
from the COVID-19 pandemic and subsequent resulting conditions continues to evolve, the ultimate impact and duration
remain uncertain at this time. The following sections provide a summary of the more relevant financial impacts, risk
monitoring activities, and operational considerations for Indemnity and the Exchange.
The impact the COVID-19 pandemic has on the premiums written by the Exchange, our sole customer, affects our management
fee revenue. The uncertainty of the ongoing impacts of the COVID-19 pandemic will likely continue until such time as the
spread of the virus is contained or reaches endemic status. In response to reduced driving conditions in 2020 resulting from the
COVID-19 pandemic, the Exchange implemented $200 million in personal and commercial auto rate reductions on policies
written between July 1, 2020 and June 30, 2021. These rate reductions resulted in a decrease to Exchange’s written premium of
approximately $110 million and $90 million for 2021 and 2020, respectively, and a corresponding decrease in our management
fee revenue of approximately $27.5 million and $22.5 million in 2021 and 2020, respectively. As driving activity returned to
near pre-pandemic levels in 2021, increased claim frequency and severity negatively impacted Exchange’s operations and may
continue to impact future premium rates. There may also be other market and/or regulatory pressures that could impact the
Exchange’s operations. While financial markets remained generally strong in 2021, we could experience future losses and/or
impairments to the portfolio due to the ongoing pandemic and inflationary pressures. We have provided additional disclosure
of these impacted areas throughout our Management’s Discussion and Analysis that follows. A broader discussion of the
potential future impacts has also been disclosed in Financial Condition and Liquidity and Capital Resources contained within
this report, as well as Part I. Item 1A. "Risk Factors" contained within this report.
From March of 2020 through the end of 2021 we had a dedicated internal committee comprised of management from various
finance disciplines reviewing our risk positions and emerging trends on an ongoing basis as circumstances were evolving. The
committee reviewed risk scenarios and performed stress tests, including the review of cash flow trends, liquidity requirements
and other forms of risk quantification. This provided tools for management, as well as our Risk Committee of the Board of
Directors, to assess risks and prioritize key issues.
While we were not required to close our physical locations under the state mandated closure of nonessential services, out of
concern for the health and safety of our employees, over 90% of our workforce has been working remote since March 2020.
We have had no significant interruption to our core business processes or systems to date. We have had no significant changes
to our financial close or reporting processes or related internal controls, nor do we anticipate any significant future challenges at
this time. We have a dedicated team responsible for the development and implementation of a return to office plan. We began
returning some employees to our offices in July 2021, but paused as a result of the national increase in infections. We plan to
resume returning employees to our offices in phases when we consider it appropriate.
19
Financial Overview
Years ended December 31,
(dollars in thousands, except per share data) 2021 % Change 2020 % Change 2019
Operating income decreased in 2021 compared to 2020 as growth in operating expenses outpaced the growth in operating
revenues. Management fee revenue is based upon the management fee rate we charge and the direct and affiliated assumed
premiums written by the Exchange. The management fee rate was 25% for 2021, 2020, and 2019. The direct and affiliated
assumed premiums written by the Exchange increased 3.3% to $7.9 billion in 2021 and 1.7% to $7.6 billion in 2020.
Cost of operations for policy issuance and renewal services increased 5.6% to $1.7 billion in 2021 primarily due to higher
commissions driven by direct and affiliated assumed written premium growth, increased technology costs, increased
administrative and other costs, and higher agent incentive compensation from profitable growth. Cost of operations for policy
issuance and renewal services increased 3.3% to $1.6 billion in 2020 primarily due to higher commissions driven by direct and
affiliated assumed written premium growth, higher agent incentive compensation driven by lower automobile claims frequency
experienced by the Exchange, and higher personnel costs.
Management fee revenue for administrative services decreased 2.0% to $58.3 million in 2021 compared to an increase of 4.0%
to $59.5 million in 2020. The administrative services reimbursement revenue and corresponding cost of operations increased
both total operating revenue and total operating expenses to $638.5 million in 2021 and $609.4 million in 2020, but had no net
impact on operating income.
Total investment income increased $34.5 million in 2021 primarily due to an increase in net investment income which was
driven by favorable results in our limited partnership portfolio. Total investment income decreased $7.1 million in 2020
primarily driven by higher impairments and lower net investment income reflecting lower interest rates due to market volatility
caused by the COVID-19 pandemic.
The financial statements include amounts based upon estimates and assumptions that have a significant effect on reported
amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period and related disclosures. We consider an accounting estimate to be critical if 1) it requires
assumptions to be made that were uncertain at the time the estimate was made, and 2) different estimates that could have been
used, or changes in the estimate that are likely to occur from period-to-period, could have a material impact on our Statements
of Operations or Financial Position.
The following presents a discussion of those accounting policies surrounding estimates that we believe are the most critical to
our reported amounts and require the most subjective and complex judgment. If actual events differ significantly from the
underlying assumptions, there could be material adjustments to prior estimates that could potentially adversely affect our results
of operations, financial condition, and cash flows. The estimates and the estimating methods used are reviewed continually, and
any adjustments considered necessary are reflected in current earnings.
Investment Valuation
Fair Value Measurements
We make estimates concerning the fair value of our investments using valuation techniques to derive the fair value of the fixed
maturity investments we hold. Fair value is the price that would be received to sell an asset in an orderly transaction between
willing market participants at the measurement date.
Fair value measurements are based upon observable and unobservable inputs. Observable inputs reflect market data obtained
from independent sources, while unobservable inputs reflect our view of market assumptions in the absence of observable
market information. We utilize valuation techniques that maximize the use of observable inputs and minimize the use of
unobservable inputs. Our investments are categorized into a three-level fair value hierarchy which assigns a Level 1 for highly
observable inputs and a Level 3 to unobservable inputs. We continually assess whether or not an active market exists for all of
our investments and as of each reporting date we re-evaluate their classification in the fair value hierarchy.
As of each reporting period, financial instruments recorded at fair value are classified based upon the lowest level of input that
is significant to the fair value measurement. The presence of at least one unobservable input that has significant impact to the
fair value measurement would result in classification as a Level 3 instrument. Our assessment of the significance of a particular
input to the fair value measurement requires judgment, and considers factors specific to the asset, such as the relative impact on
the fair value as a result of including a particular input and market conditions. While estimates of the fair values of our
investment portfolio are obtained from outside pricing services, we ultimately determine whether the inputs used are observable
or unobservable.
As of December 31,2021, substantially all of the securities measured at fair value in our investment portfolio are classified as
Level 2. Level 2 securities are valued using industry-standard models that consider various inputs, such as the interest rate and
credit spread for the underlying financial instruments. All significant inputs are observable, or derived from observable
information in the marketplace, or are supported by observable levels at which transactions are executed in the marketplace. At
December 31, 2021, our investments classified as Level 3 were not significant.
See Item 8. "Financial Statements and Supplementary Data - Note 5, Fair Value, of Notes to Financial Statements" contained
within this report for additional details on the fair value measurement of our investments.
Impairments
We regularly monitor our fixed maturity and equity security portfolios for price changes and perform detailed reviews of
securities in an unrealized loss position that may indicate that credit-related or other impairments exist.
As of December 31, 2021, we do not have significant unrealized losses and our credit-related or other impairments were not
material to our financial condition or results of operations.
See Item 8. "Financial Statements and Supplementary Data - Note 2, Significant Accounting Policies, of Notes to Financial
Statements" contained within this report for additional details on impairments of available-for-sale securities.
21
Retirement Benefit Plans for Employees
Our pension plans consist of a noncontributory defined benefit pension plan covering substantially all employees and an
unfunded supplemental employee retirement plan ("SERP") for certain members of executive and senior management.
Although we are the sponsor of these postretirement plans and record the funded status of these plans, the Exchange and its
subsidiaries reimburse us for approximately 58% of the annual benefit expense of these plans, which includes pension benefits
for employees performing administrative services and the Exchange's allocated share of costs for employees in departments that
support the administrative functions.
Our pension obligation is developed from actuarial estimates. Several statistical and other factors, which attempt to anticipate
future events, are used in calculating the expense and liability related to the plans. Key factors include assumptions about the
discount rates and expected rates of return on plan assets. We review these assumptions annually and modify them considering
historical experience, current market conditions, including changes in investment returns and interest rates, and expected future
trends.
Accumulated and projected benefit obligations are expressed as the present value of future cash payments. We discount those
cash payments based upon a yield curve developed from corporate bond yield information with maturities that correspond to the
payment of benefits. Lower discount rates increase present values and subsequent year pension expense, while higher discount
rates decrease present values and subsequent year pension expense. The construction of the yield curve is based upon yields of
corporate bonds rated AA or equivalent quality. Target yields are developed from bonds at various maturity points and a curve
is fitted to those targets. Spot rates (zero coupon bond yields) are developed from the yield curve and used to discount benefit
payment amounts associated with each future year. The present value of plan benefits is calculated by applying the spot/
discount rates to projected benefit cash flows. A single discount rate is then developed to produce the same present value. The
cash flows from the yield curve were matched against our projected benefit payments in the pension plan, which have a
duration of about 19 years. This yield curve supported the selection of a 3.16% discount rate for the projected benefit
obligation at December 31, 2021 and for the 2022 pension expense. The same methodology was used to develop the 2.96% and
3.59% discount rates used to determine the projected benefit obligation for 2020 and 2019, respectively, and the pension
expense for 2021 and 2020, respectively. A 25 basis point decrease in the discount rate assumption, with other assumptions
held constant, would increase pension cost in the following year by $6.4 million, of which our share would be approximately
$2.7 million, and would increase the pension benefit obligation by $59.2 million.
Unrecognized actuarial gains and losses arise from several factors, including experience and assumption changes in the
obligations and from the difference between expected returns and actual returns on plan assets. These unrecognized gains and
losses are recorded in the pension plan obligation and accumulated other comprehensive income (loss). These amounts are
systematically recognized to net periodic pension expense in future periods, with gains decreasing and losses increasing future
pension expense. If actuarial net gains or losses exceed 5% of the greater of the projected benefit obligation and the market-
related value of plan assets, the excess is recognized through the net periodic pension expense equally over the estimated
service period of the employee group, which is currently 14 years.
The expected long-term rate of return for the pension plan represents the average rate of return to be earned on plan assets over
the period the benefits included in the benefit obligation are to be paid. To determine the expected long-term rate of return
assumption, we utilized models based upon rigorous historical analysis and forward-looking views of the financial markets
based upon key factors such as historical returns for the asset class' applicable indices, the correlations of the asset classes under
various market conditions and consensus views on future real economic growth and inflation. The expected future return for
each asset class is then combined by considering correlations between asset classes and the volatilities of each asset class to
produce a reasonable range of asset return results within which our expected long-term rate of return assumption falls. The
expected long-term rate of return is less susceptible to annual revisions, as there are typically no significant changes in the asset
mix. Based on the current asset allocation and a review of the key factors and expectations of future asset performance, the
expected return on asset assumption remained at 5.50% for 2022. A change of 25 basis points in the expected long-term rate of
return assumption, with other assumptions held constant, would have an estimated $2.4 million impact on net pension benefit
cost in the following year, of which our share would be approximately $1.0 million.
We use a four-year averaging method to determine the market-related value of plan assets, which is used to determine the
expected return component of pension expense. Under this methodology, asset gains or losses that result from returns that
differ from our long-term rate of return assumption are recognized in the market-related value of assets on a level basis over a
four-year period. The market-related asset experience during 2021 that related to the actual investment return being different
from that assumed during the prior year was a gain of $36.7 million. Recognition of this gain will be deferred and recognized
over a four-year period, consistent with the market-related asset value methodology. Once factored into the market-related
asset value, these experience gains and losses will be amortized over a period of 14 years, which is the remaining service period
of the employee group.
22
We expect our net pension benefit costs to decrease from $57.1 million in 2021 to $45.9 million in 2022 primarily resulting
from anticipated plan progression and liability gains due to the higher discount rate. Our share of the net pension benefit costs
after reimbursements was $24.0 million in 2021. We expect our share of the net pension benefit costs to be approximately
$19.3 million in 2022.
The actuarial assumptions we used in determining our pension obligation may differ materially from actual results due to
changing market and economic conditions, higher or lower withdrawal rates, or longer or shorter life spans of participants.
While we believe that the assumptions used are appropriate, differences in actual experience or changes in assumptions may
materially affect our financial position, results of operations, or cash flows. See Item 8. "Financial Statements and
Supplementary Data - Note 9, Postretirement Benefits, of Notes to Financial Statements" contained within this report for
additional details on the pension plans.
23
RESULTS OF OPERATIONS
The following table presents the allocation and disaggregation of revenue for our two performance obligations:
Years ended December 31,
(dollars in thousands) 2021 % Change 2020 % Change 2019
Administrative services
Direct and affiliated assumed premiums written by
the Exchange $7,868,311 3.3 % $7,613,519 1.7 % $7,486,030
Management fee rate 0.7 % 0.8 % 0.8 %
Management fee revenue 55,078 (9.6) 60,908 1.7 59,888
Change in contract liability (2) 3,195 NM (1,376) 47.8 (2,633)
Change in estimate for management fee returned
on cancelled policies (1) 13 NM (69) (34.6) (51)
Management fee revenue - administrative services 58,286 (2.0) 59,463 4.0 57,204
Administrative services reimbursement revenue 638,483 4.8 609,435 4.7 582,010
Total revenue from administrative services $ 696,769 4.2 % $ 668,898 4.6 % $ 639,214
NM = not meaningful
(1) A constraining estimate of variable consideration exists related to the potential for management fees to be returned if a policy were to be cancelled
mid-term. Management fees are returned to the Exchange when policies are cancelled mid-term and unearned premiums are refunded.
(2) Management fee revenue - administrative services is recognized over time as the services are performed. See Item 8. "Financial Statements - Note 3,
Revenue, of Notes to Financial Statements" contained within this report.
24
Direct and affiliated assumed premiums written by the Exchange
Direct and affiliated assumed premiums include premiums written directly by the Exchange and premiums assumed from its
wholly owned property and casualty subsidiaries. Direct and affiliated assumed premiums written by the Exchange increased
3.3% to $7.9 billion in 2021, from $7.6 billion in 2020, primarily driven by increased homeowners and commercial multi-peril
premiums written. Year-over-year policies in force for all lines of business increased 3.2% in 2021 as the result of continuing
strong policyholder retention and an increase in new policies written, compared to 2.1% in 2020. The year-over-year average
premium per policy for all lines of business increased 0.1% at December 31, 2021, compared to a decrease of 0.4% at
December 31, 2020. The year-over-year average premium per policy at both December 31, 2021 and 2020 was impacted by the
rate reductions for personal and commercial auto policies written between July 1, 2020 and June 30, 2021, in response to the
lower driving activity and to provide financial relief as a result of the COVID-19 pandemic.
Premiums generated from new business increased 13.2% to $965 million in 2021. New business policies written increased
9.0% in 2021 and year-over-year average premium per policy on new business increased 3.9% at December 31, 2021.
Premiums generated from new business decreased 1.2% to $852 million in 2020. While new business policies written
increased 5.0% in 2020, year-over-year average premium per policy on new business decreased 5.9% at December 31, 2020.
Premiums generated from renewal business increased 2.1% to $6.9 billion in 2021, compared to 2.1%, or $6.8 billion, in 2020.
Underlying the trend in renewal business premiums was steady policy retention ratios, partially offset by a 0.3% decrease in
year-over-year average premium per policy at December 31, 2021, compared to an increase of 0.4% at December 31, 2020.
The Exchange implements rate changes in order to meet loss cost expectations. As the Exchange writes policies with annual
terms only, rate actions take 12 months to be fully recognized in written premium and 24 months to be recognized in earned
premiums. Since rate changes are realized at renewal, it takes 12 months to implement a rate change to all policyholders and
another 12 months to earn the increased or decreased premiums in full. As a result, certain rate changes approved in 2020,
including those in response to reduced driving conditions resulting from the COVID-19 pandemic, were reflected in 2021, and a
portion of the rate actions in 2021 will be reflected in 2022. The Exchange continuously evaluates pricing and product
offerings to meet consumer demands.
Personal lines – Total personal lines premiums written increased 2.5% to $5.5 billion in 2021, from $5.4 billion in 2020, driven
by an increase in total personal lines policies in force of 3.1%. Total personal lines year-over-year average premium per policy
decreased 0.6% at December 31, 2021, compared to the prior year, driven by personal auto rate reductions. Total personal lines
policies in force increased 2.2% in 2020 and year-over-year average premium per policy decreased 0.8% at December 31, 2020.
Commercial lines – Total commercial lines premiums written increased 5.4% to $2.4 billion in 2021, compared to 2020, driven
by a 3.6% increase in total commercial lines policies in force and a 1.7% increase in the total commercial lines year-over-year
average premium per policy. Total commercial lines premiums written increased 2.6% in 2020, compared to 2019, driven by a
1.6% increase in total commercial lines policies in force and a 0.9% increase in the total commercial lines year-over-year
average premium per policy.
Future trends-premium revenue – Through a careful agency selection process, the Exchange plans to continue its effort to
expand the size of its agency force to increase market penetration in existing operating territories to contribute to future growth.
Changes in premium levels attributable to the growth in policies in force directly affect the profitability of the Exchange and
have a direct bearing on our management fee. Our continued focus on underwriting discipline and the maturing of pricing
sophistication models have contributed to the Exchange's steady policy retention ratios. The continued growth of its policy
base is dependent upon the Exchange's ability to retain existing and attract new subscribers/policyholders. A lack of new policy
growth or the inability to retain existing customers could have an adverse effect on the Exchange's premium level growth, and
consequently our management fee.
Changes in premium levels attributable to rate changes also directly affect the profitability of the Exchange and have a direct
bearing on our management fee. Pricing actions contemplated or taken by the Exchange are subject to various regulatory
requirements of the states in which it operates. The pricing actions already implemented, or to be implemented, have an effect
on the market competitiveness of the Exchange's insurance products. Such pricing actions, and those of the Exchange's
competitors, could affect the ability of the Exchange's agents to retain and attract new business; additionally, exposure
reductions and/or changes in mix of business as a result of economic conditions due to the COVID-19 pandemic or other
significant unexpected events could impact the average premium written and affiliated assumed by the Exchange, as customers
may reduce coverages. Future premiums could also be impacted by potential regulatory changes resulting from the COVID-19
pandemic. Longer-term, increased driving activity may result in increased future rates due to higher claims and severity. We
expect the Exchange's pricing actions to result in a net increase in direct written premium in 2022; however, the extent of the
impact to the Exchange's premiums and our management fee cannot be estimated with a high degree of certainty at this time
given the ongoing developments related to this pandemic and current inflationary trends. See also Part I, Item 1A. "Risk
Factors" contained within this report.
25
Policy issuance and renewal services
Years ended December 31,
(dollars in thousands) 2021 % Change 2020 % Change 2019
Commissions:
Total commissions $1,108,426 5.4 % $1,051,272 2.6 % $1,024,654
Non-commission expense:
Underwriting and policy processing $ 165,183 2.8 % $ 160,646 3.7 % $ 154,934
Information technology 185,096 6.5 173,827 3.7 167,600
Sales and advertising 52,511 (1.3) 53,212 1.6 52,362
Customer service 36,720 6.0 34,638 7.1 32,353
Administrative and other 129,461 12.3 115,302 8.7 106,046
Total non-commission expense 568,971 5.8 537,625 4.7 513,295
Total cost of policy issuance and renewal
services $1,677,397 5.6 % $1,588,897 3.3 % $1,537,949
Commissions – Commissions increased $57.2 million in 2021 compared to 2020 resulting from higher direct and affiliated
assumed premiums written by the Exchange, primarily in lines of business that pay a higher commission rate. To a lesser
extent, there was also an increase in agent incentive compensation in 2021 compared to 2020 related to profitable growth.
Commissions increased $26.6 million in 2020 compared to 2019 resulting from higher direct and affiliated assumed premiums
written by the Exchange and higher agent incentive compensation. The Exchange experienced a significant decrease in
automobile claims frequency and related loss expense beginning March 2020 that continued through May 2020 driven by the
COVID-19 pandemic, which contributed to an increase in the profitability component of the agent incentive bonuses.
26
Non-commission expense – Non-commission expense increased $31.3 million in 2021 compared to 2020. Underwriting and
policy processing costs increased $4.5 million primarily due to increased personnel costs and underwriting report costs.
Information technology costs increased $11.3 million primarily due to increased hardware and software costs and personnel
costs. Administrative and other expenses increased $14.2 million primarily due to increased professional fees and building and
equipment depreciation. Personnel costs in all categories were impacted by higher medical costs compared to the prior year as
the COVID-19 pandemic reduced elective procedures in 2020.
In 2020, non-commission expense increased $24.3 million compared to 2019. Underwriting and policy processing costs
increased $5.7 million primarily due to increased personnel costs and underwriting report costs. Information technology costs
increased $6.2 million primarily due to increased personnel costs and hardware and software costs. Administrative and other
expenses increased $9.3 million primarily driven by increased personnel costs. Increased personnel costs in all categories
included higher incentive plan award accruals related to underwriting performance in 2020 compared to targets and higher
vacation accruals as employees took less vacation in 2020 as a result of the COVID-19 pandemic.
Administrative services
Years ended December 31,
(dollars in thousands) 2021 % Change 2020 % Change 2019
Management fee revenue - administrative services $ 58,286 (2.0) % $ 59,463 4.0 % $ 57,204
Administrative services reimbursement revenue 638,483 4.8 609,435 4.7 582,010
Total revenue allocated to administrative services 696,769 4.2 668,898 4.6 639,214
Administrative services expenses
Claims handling services 546,962 4.2 525,072 3.7 506,491
Investment management services 38,862 5.5 36,835 9.5 33,640
Life management services 52,659 10.8 47,528 13.5 41,879
Operating income - administrative services $ 58,286 (2.0) % $ 59,463 4.0 % $ 57,204
Administrative services
We allocate a portion of the management fee, which currently equates to 0.7% of the direct and affiliated assumed premiums
written by the Exchange, to the administrative services. The allocation of management fee for these services was 0.8% in both
2020 and 2019. This portion of the management fee is recognized as revenue over a four-year period representing the time over
which the services are provided. We also report reimbursed costs as revenues, which are recognized monthly as services are
provided. The administrative services expenses we incur and the related reimbursements we receive are recorded gross in the
Statements of Operations.
27
Total investment income
A summary of the results of our investment operations is as follows for the years ended December 31:
Net realized and unrealized gains of $4.9 million in 2021 were primarily due to disposals of available-for-sale securities. Net
realized and unrealized gains of $6.4 million in 2020 were primarily due to market value adjustments on equity securities and
from the sale of available-for-sale securities, while gains of $6.1 million in 2019 were primarily due to sales of available-for-
sale securities and increases in fair value of equity securities.
28
Financial Condition of Erie Insurance Exchange
Serving in the capacity of attorney-in-fact for the Exchange, we are dependent on the growth and financial condition of the
Exchange, who is our sole customer. The strength of the Exchange and its wholly owned subsidiaries is rated annually by A.M.
Best Company through assessing its financial stability and ability to pay claims. The ratings are generally based upon factors
relevant to policyholders and are not directed toward return to investors. The Exchange and each of its property and casualty
subsidiaries are rated A+ "Superior", the second highest financial strength rating, which is assigned to companies that have
achieved superior overall performance when compared to the standards established by A.M. Best and have a superior ability to
meet obligations to policyholders over the long term. On July 27, 2021, the outlook for the financial strength rating was
affirmed as stable. As of December 31, 2021, only approximately 12% of insurance groups, in which the Exchange is included,
are rated A+ or higher.
The financial statements of the Exchange are prepared in accordance with statutory accounting principles prescribed by the
Commonwealth of Pennsylvania. Financial statements prepared under statutory accounting principles focus on the solvency of
the insurer and generally provide a more conservative approach than under U.S. generally accepted accounting principles.
Statutory direct written premiums of the Exchange and its wholly owned property and casualty subsidiaries grew 3.3% to $7.9
billion in 2021 from $7.6 billion in 2020. These premiums, along with investment income, are the major sources of cash that
support the operations of the Exchange. Policyholders' surplus, determined under statutory accounting principles, was $11.7
billion and $10.7 billion at December 31, 2021 and 2020, respectively. The Exchange and its wholly owned property and
casualty subsidiaries' year-over-year policy retention ratio continues to be high at 90.1% at December 31, 2021 and 89.9% at
December 31, 2020.
We have prepared our financial statements considering the financial strength of the Exchange based on its A.M. Best rating and
strong level of surplus. We are monitoring risks related to the COVID-19 pandemic on an ongoing basis and believe that the
Exchange falls within established risk tolerances. However, see Part I, Item 1A. "Risk Factors" for possible outcomes that
could impact that determination.
29
FINANCIAL CONDITION
Investments
Our investment portfolio is managed with the objective of maximizing after-tax returns on a risk-adjusted basis. The following
table presents the carrying value of our investments as of December 31:
(dollars in thousands) % to % to
2021 total 2020 total
Fixed maturities $ 946,085 83 % $ 928,236 84 %
Equity securities 87,743 8 94,090 9
Agent Loans (1) 66,368 6 69,212 6
Other investments 36,846 3 14,325 1
Total investments $ 1,137,042 100 % $ 1,105,863 100 %
(1) The current portion of agent loans is included with prepaid expenses and other current assets in the Statements of Financial Position.
We continually review our investment portfolio for impairment and determine whether the impairment is a result of credit loss
or other factors. We individually analyze all positions with an emphasis on those in a significant unrealized loss position. If we
have the intent to sell or it's more likely than not that we would be required to sell the security before recovery of the amortized
cost basis, the entire impairment is recognized in earnings. Factors considered in the evaluation of credit loss include the extent
to which fair value is less than cost and fundamental factors specific to the issuer such as financial condition, changes in credit
ratings, near and long-term business prospects and other factors, as well as the likelihood of recovery of the amortized cost of
the security. Impairment resulting from credit loss is recognized in earnings with a corresponding allowance on the balance
sheet. We believe our investment valuation philosophy and accounting practices result in appropriate and timely measurement
of fair value and recognition of impairment.
Fixed maturities
Under our investment strategy, we maintain a fixed maturity portfolio that is of high quality and well diversified within each
market sector. This investment strategy also achieves a balanced maturity schedule. Our fixed maturity portfolio is managed
with the goal of achieving reasonable returns while limiting exposure to risk.
Fixed maturities are carried at fair value with unrealized gains and losses, net of deferred taxes, included in shareholders' equity.
Net unrealized gains on fixed maturities, net of deferred taxes, totaled $6.2 million at December 31, 2021, compared to net
unrealized gains of $23.3 million at December 31, 2020.
The following table presents a breakdown of the fair value of our fixed maturity portfolio by industry sector and rating as of
December 31, 2021: (1)
(in thousands) Non-
investment Fair
AAA AA A BBB grade value
Basic materials $ 0 $ 0 $ 3,155 $ 0 $ 7,937 $ 11,092
Communications 0 8,659 8,361 17,283 17,038 51,341
Consumer 0 3,138 17,849 70,598 41,639 133,224
Diversified 0 0 0 0 1,200 1,200
Energy 0 4,116 7,729 20,336 8,501 40,682
Financial 0 1,007 74,082 121,559 17,243 213,891
Industrial 0 0 9,861 16,794 26,914 53,569
Structured securities (2) 141,897 180,935 26,945 18,851 0 368,628
Technology 5,150 0 7,727 20,937 13,908 47,722
U.S. Treasury 0 4,292 0 0 0 4,292
Utilities 0 0 3,707 12,912 3,825 20,444
Total $ 147,047 $ 202,147 $ 159,416 $ 299,270 $ 138,205 $ 946,085
(1) Ratings are supplied by S&P, Moody’s, and Fitch. The table is based upon the lowest rating for each security.
(2) Structured securities include residential and commercial mortgage-backed securities, collateralized debt obligations, and asset-backed securities.
30
Equity Securities
Equity securities primarily include nonredeemable preferred stocks and are carried at fair value in the Statements of Financial
Position with all changes in unrealized gains and losses reflected in the Statements of Operations.
The following table presents an analysis of the fair value of our equity securities by sector as of December 31:
(in thousands) 2021 2020
Communications $ 0 $ 2,699
Consumer 3,314 3,068
Energy 6,448 2,206
Financial services 71,722 76,575
Industrial 0 800
Utilities 6,259 8,742
Total $ 87,743 $ 94,090
Shareholders' Equity
Postretirement benefit plans
The funded status of our postretirement benefit plans is recognized in the Statements of Financial Position, with a
corresponding adjustment to accumulated other comprehensive income (loss), net of tax. At December 31, 2021, shareholders'
equity amounts related to these postretirement plans increased by $70.0 million, net of tax, of which $13.9 million represents
amortization of the prior service cost and net actuarial loss and $56.1 million represents the current period actuarial gain. The
2021 actuarial gain was primarily due to higher than expected returns on plan assets. At December 31, 2020, shareholders'
equity amounts related to these postretirement plans increased by $20.0 million, net of tax, of which $10.6 million represents
amortization of the prior service cost and net actuarial loss and $9.4 million of current period actuarial gain. The 2020 actuarial
gain was driven by higher than expected returns on assets which exceeded losses incurred as a result of the lower discount rate
in 2020. Although we are the sponsor of these postretirement plans and record the funded status of these plans, the Exchange
and its subsidiaries reimburse us for approximately 58% of the annual benefit expense of these plans, which includes pension
benefits for employees performing administrative services and their allocated share of costs for employees in departments that
support the administrative functions.
31
LIQUIDITY AND CAPITAL RESOURCES
We continue to monitor the sufficiency of our liquidity and capital resources given the potential impact of the COVID-19
pandemic and subsequent resulting conditions, including inflationary costs. While we did not see a significant impact on our
sources or uses of cash in 2021, future disruptions in the markets could occur which may affect our liquidity position. If our
normal operating and investing cash activities were to become insufficient to meet future funding requirements, we believe we
have sufficient access to liquidity through our cash position, liquid marketable securities and our $100 million line of credit that
does not expire until October 2026. See broader discussions of potential risks to our operations in the Operating Overview and
Part I, Item 1A. "Risk Factors" contained within this report.
We have certain obligations and commitments to make future payments under various agreements. Cash requirements within
the next twelve months include accounts payable and accrued liabilities, the current portion of long-term borrowings, and other
current obligations.
Our long-term cash requirements under various contractual obligations and commitments include:
• Debt and interest payments – See Part II, Item 8. "Financial Statements and Supplementary Data - Note 8. Borrowing
Arrangements, of Notes to Financial Statements" for details of our obligations and the timing of expected future
payments.
• Pension – We have a funded noncontributory defined benefit pension plan covering substantially all employees and an
unfunded supplemental employee retirement plan ("SERP") for certain members of executive senior management. See
Part II, Item 8. "Financial Statements and Supplementary Data – Note 9. Postretirement Benefits, of Notes to Financial
Statements" for the funding policy for our defined benefit pension plan and accumulated benefit obligation for our
unfunded SERP.
• Deferred compensation – We have two deferred compensation plans for our executives, senior vice presidents, and
other selected officers and two deferred compensation plans for our outside directors. See Part II, Item 8. "Financial
Statements and Supplementary Data – Note 10. Incentive and Deferred Compensation Plans, of Notes to Financial
Statements" for additional details of these obligations and estimated future payments.
• Other commitments – We have commitments for approximately $424 million which include agreements for various
services, including information technology, support, and maintenance obligations, operating leases for equipment,
vehicles, and real estate, and other obligations in the ordinary course of business. We expect to make future cash
payments according to the contract terms. These agreements are enforceable and legally binding and specify fixed
amounts or minimum quantities to be purchased. Some agreements may contain cancellation provisions, some of
which may require us to pay a termination fee. Over half of these commitments are due in the next 12 months. We are
reimbursed from the Exchange and its subsidiaries for the portion of these costs related to administrative services.
We believe that our current cash, cash equivalents and marketable securities and cash generated from operations will be
sufficient to meet our current and future cash requirements.
Volatility in the financial markets presents challenges to us as we do occasionally access our investment portfolio as a source of
cash. Some of our fixed income investments, despite being publicly traded, may be illiquid. Volatility in these markets could
impair our ability to sell certain of our fixed income securities or cause such securities to sell at deep discounts. We believe we
have sufficient liquidity to meet our needs from sources other than the liquidation of securities.
32
Cash flow activities
The following table provides condensed cash flow information for the years ended December 31:
(in thousands) 2021 2020 2019
Net cash provided by operating activities $ 402,794 $ 342,595 $ 364,527
Net cash used in investing activities (185,490) (243,225) (124,634)
Net cash used in financing activities (194,842) (274,869) (169,571)
Net increase (decrease) in cash $ 22,462 $ (175,499) $ 70,322
Net cash provided by operating activities was $402.8 million in 2021, compared to $342.6 million in 2020 and $364.5 million
in 2019. Increased cash provided by operating activities in 2021 was primarily due to an increase in management fees received
driven by growth in direct and affiliated assumed premiums written by the Exchange of $94.6 million and an increase in
administrative service reimbursements received of $46.9 million. Partially offsetting the increase in cash provided by operating
activities was an increase in cash paid for agent commissions of $37.4 million due to higher scheduled commission driven by
premium growth, an increase in administrative services expenses paid of $33.8 million and an increase in agent bonuses of
$15.4 million, compared to 2020. Decreased cash provided by operating activities in 2020 was primarily due to an increase in
cash paid for agent commissions of $33.3 million due to higher scheduled commissions driven by premium growth, increased
general operating expenses paid of $17.4 million and increased administrative services expenses paid of $16.2 million.
Offsetting the decrease in cash provided by operating activities was an increase of $42.5 million in management fee received
driven by growth in direct and affiliated assumed premiums written by the Exchange, compared to 2019.
Net cash used in investing activities totaled $185.5 million in 2021, compared to $243.2 million in 2020 and $124.6 million in
2019. In 2021, net cash used in investing activities was primarily driven by fixed asset purchases of $148.8 million, which
included the purchase of the home office from the Exchange. To a lesser extent, purchases of investments exceeded proceeds
generated from sales and maturities/calls of investments. In 2020, net cash used in investing activities was primarily driven by
purchases of investments exceeding proceeds generated from sales and maturities/calls of investments. In 2019, net cash used
in investing activities was primarily driven by fixed asset purchases of $102.0 million primarily related to the new home office
building which was funded primarily by the senior secured draw term loan facility.
Net cash used in financing activities totaled $194.8 million in 2021, compared to $274.9 million in 2020 and $169.6 million in
2019. The decrease in cash used in 2021, compared to 2020, was due to a decrease in dividends paid to shareholders by $80.1
million, compared to 2020. The increase in cash used in 2020, compared to 2019, was due to an increase in dividends paid to
shareholders. In addition to the normal quarterly dividends paid in 2020, the Board also declared a special one-time cash
dividend of $2.00 on each Class A share and $300 on each Class B share totaling $93.1 million, which was paid in December
2020.
No shares of our Class A nonvoting common stock were repurchased in 2021, 2020 and 2019 in conjunction with our stock
repurchase program. In 2011, our Board of Directors approved a continuation of the current stock repurchase program for a
total of $150 million with no time limitation. This repurchase authority includes, and is not in addition to, any unspent amounts
remaining under the prior authorization. We had approximately $17.8 million of repurchase authority remaining under this
program at December 31, 2021, based upon trade date.
We purchase shares of our outstanding Class A nonvoting common stock outside of our publicly announced share repurchase
program for certain stock-based incentive plans. We purchased 26,667 shares for $5.3 million in 2021, 31,248 shares for $5.8
million in 2020 and 15,003 shares for $2.6 million in 2019 to settle awards for our equity compensation plan and to fund the
rabbi trust for the outside director deferred stock compensation plan and the incentive compensation deferral plan. All shares
were delivered in the year they were purchased.
Capital Outlook
We regularly prepare forecasts evaluating the current and future cash requirements for both normal and extreme risk events,
including the current COVID-19 pandemic. Should an extreme risk event result in a cash requirement exceeding normal cash
flows, we have the ability to meet our future funding requirements through various alternatives available to us.
Outside of our normal operating and investing cash activities, future funding requirements could be met through: 1) cash and
cash equivalents, which total approximately $183.7 million at December 31, 2021, 2) a $100 million bank revolving line of
credit, and 3) liquidation of unpledged assets held in our investment portfolio, including equity securities and investment grade
bonds which totaled approximately $658.8 million at December 31, 2021. Volatility in the financial markets could impair our
33
ability to sell certain fixed income securities or cause such securities to sell at deep discounts. Additionally, we have the ability
to curtail or modify discretionary cash outlays such as those related to shareholder dividends and share repurchase activities.
As of December 31, 2021, we have access to a $100 million bank revolving line of credit with a $25 million letter of credit
sublimit that expires on October 29, 2026. As of December 31, 2021, a total of $99.1 million remains available under the
facility due to $0.9 million outstanding letters of credit, which reduce the availability for letters of credit to $24.1 million. We
had no borrowings outstanding on our line of credit as of December 31, 2021. Investments with a fair value of $120.9 million
were pledged as collateral on the line at December 31, 2021. These securities have no trading restrictions and are reported as
available-for-sale securities and cash and cash equivalents in the Statements of Financial Position. The bank requires
compliance with certain covenants, which include leverage ratios and debt restrictions. We were in compliance with our bank
covenants at December 31, 2021.
Our ERM process is founded on a governance framework that includes oversight at multiple levels of our organization,
including our Board of Directors and executive management. Accountability to identify, manage, and mitigate risk is
embedded within all functions and areas of our business. We have defined risk tolerances to monitor and manage significant
risks within acceptable levels. In addition to identifying, evaluating, prioritizing, monitoring, and mitigating significant risks,
our ERM process includes extreme event analyses and scenario testing. Given our defined tolerance for risk, risk model output
is used to quantify the potential variability of future performance and the sufficiency of capital and liquidity levels.
34
TRANSACTIONS/AGREEMENTS WITH RELATED PARTIES
Board Oversight
Our Board of Directors has a broad oversight responsibility over our intercompany relationships with the Exchange. As a
consequence, our Board of Directors may be required to make decisions or take actions that may not be solely in the interest of
our shareholders, such as setting the management fee rate paid by the Exchange to us and ratifying any other significant
activity.
All transactions within a holding company system affecting the member insurers of the holding company system must be fair
and reasonable and any charges or fees for services performed must be reasonable. Approval by the applicable insurance
commissioner is required prior to the consummation of transactions affecting the members within a holding company system.
Intercompany Agreements
Subscriber's and services agreements
We serve as attorney-in-fact for the subscribers at the Exchange, a reciprocal insurance exchange. Each applicant for insurance
to a reciprocal insurance exchange signs a subscriber's agreement that contains an appointment of an attorney-in-fact. Through
the designation of attorney-in-fact, we are required to provide policy issuance and renewal services and act as the attorney-in-
fact for the Exchange with respect to all administrative services, as discussed previously. Pursuant to the subscriber's
agreement, we earn a management fee for these services calculated as a percentage of the direct and affiliated assumed
premiums written by the Exchange. By virtue of its legal structure as a reciprocal insurer, the Exchange does not have any
employees or officers. Therefore, it enters into contractual relationships by and through the attorney-in-fact. The Exchange's
insurance subsidiaries also utilize Indemnity for all administrative services in accordance with the service agreements between
each of the subsidiaries and Indemnity. The amounts incurred for all administrative services are reimbursed to Indemnity at
cost in accordance with the subscriber's agreement and the service agreements. These reimbursements are settled on a monthly
basis. State insurance regulations require that intercompany service agreements and any material amendments be approved in
advance by the state insurance department.
Shared Facilities
We previously leased the home office from the Exchange. Rent was based on rental rates of like property in Erie, Pennsylvania
and all operating expenses including utilities, cleaning, repairs, real estate taxes, property insurance, and leasehold
improvements were the responsibility of the tenant (Indemnity). Rental costs of shared facilities under this lease were allocated
based upon usage or square footage occupied. On December 31, 2021, we purchased the home office from the Exchange. See
Part II, Item 8. "Financial Statements and Supplementary Data - Note 14. Related Party, of Notes to Financial Statements" for
additional details.
Effective July 1, 2021, the Exchange and its subsidiaries entered into a contractual agreement with Indemnity to use space in
Indemnity-owned properties. The amount charged is based on rates of like property in Erie, Pennsylvania and the usage or
square footage occupied. Operating expenses including utilities, cleaning, repairs, real estate taxes, property insurance and
leasehold improvements are allocated based upon usage or square footage occupied. The home office was added to this
agreement effective January 1, 2022.
Cost Allocation
The allocation of costs affects our financial condition and that of the Exchange and its wholly owned subsidiaries.
Management's role is to determine that allocations are consistently made in accordance with the subscriber's agreement with the
subscribers at the Exchange, intercompany service agreements, and applicable insurance laws and regulations. Allocation of
costs under these various agreements requires judgment and interpretation, and such allocations are performed using a
consistent methodology, which is intended to adhere to the terms and intentions of the underlying agreements.
Intercompany Receivables
We have significant receivables from the Exchange and its affiliates that result in a concentration of credit risk. Net receivables
from the Exchange and other affiliates were $479.1 million, or 21.4% of total assets, at December 31, 2021 and $494.6 million,
or 23.4% of total assets, at December 31, 2020. These receivables include management fees due for policy issuance and
35
renewal services performed by us under the subscriber's agreement, and certain costs we incur acting as the attorney-in-fact on
behalf of the Exchange as well as the service provider for its insurance subsidiaries with respect to all administrative services,
as discussed previously. These receivables from the Exchange and its affiliates are settled monthly. We continually monitor
the financial strength of the Exchange.
The significant volatility in the financial markets and uncertainty resulting from the COVID-19 pandemic continues to evolve
and the pandemic’s ultimate impact and duration remain uncertain. We could experience future losses and/or impairments to
the portfolio given the pandemic’s impact on market conditions.
Market Risk
Market risk is the risk of loss arising from adverse changes in interest rates, credit spreads, equity prices, or foreign exchange
rates, as well as other relevant market rate or price changes. The volatility and liquidity in the markets in which the underlying
assets are traded directly influence market risk. The following is a discussion of our primary risk exposures, including interest
rate risk, investment credit risk, concentration risk, liquidity risk, and equity price risk, and how those exposures are currently
managed as of December 31, 2021.
A sensitivity analysis is used to measure the potential loss in future earnings, fair values, or cash flows of interest-sensitive
instruments resulting from one or more selected hypothetical changes in interest rates and other market rates or prices over a
selected period. The following pro forma information is presented assuming a 100-basis point parallel increase in interest rates
across the yield curve at December 31 of each year and reflects the estimated effect on the fair value of our fixed maturity
portfolio.
36
While the fixed maturity portfolio is sensitive to interest rates, the future principal cash flows that will be received by
contractual maturity date are presented below at December 31, 2021 and 2020. Actual cash flows may differ from those stated
as a result of calls, prepayments, or defaults.
(in thousands)
Fixed maturities: December 31, 2020
2021 $ 17,403
2022 48,958
2023 107,507
2024 142,707
2025 110,105
Thereafter 452,168
Total $ 878,848
Fair value $ 928,236
Generally, the fixed maturities in our portfolio are rated by external rating agencies. If not externally rated, we rate them
internally on a basis consistent with that used by the rating agencies. We classify all fixed maturities as available-for-sale
securities, allowing us to meet our liquidity needs and provide greater flexibility to appropriately respond to changes in market
conditions.
37
The following tables show our fixed maturity investments by rating(1):
At December 31, 2021
(dollars in thousands) Amortized cost Fair value Percent of total
AAA, AA, A $ 506,271 $ 508,610 54 %
BBB 295,681 299,270 31
Total investment grade 801,952 807,880 85
BB 45,541 46,922 5
B 76,144 76,913 8
CCC, CC, C, and below 14,642 14,370 2
Total non-investment grade 136,327 138,205 15
Total $ 938,279 $ 946,085 100 %
We are also exposed to a concentration of credit risk with the Exchange. See the "Transactions/Agreements with Related
Parties, Intercompany Receivables" section of Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contained within this report for further discussion of this risk.
Concentration Risk
While our portfolio is well diversified within each market sector, there is an inherent risk of concentration in a particular
industry or sector. We continually monitor our level of exposure to individual issuers as well as our allocation to each industry
and market sector against internally established policies. See the "Financial Condition" section of Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations" contained within this report for details of
investment holdings by sector.
Liquidity Risk
Periods of volatility in the financial markets can create conditions where fixed maturity investments, despite being publicly
traded, can become illiquid. However, we actively manage the maturity profile of our fixed maturity portfolio such that
scheduled repayments of principal occur on a regular basis.
38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page Number
Report of Independent Registered Public Accounting Firm (PCAOB ID: 42) 39
Statements of Operations for the Years Ended December 31, 2021, 2020 and 2019 41
Statements of Comprehensive Income for the Years Ended December 31, 2021, 2020 and 2019 42
Statements of Financial Position - December 31, 2021 and 2020 43
Statements of Shareholders' Equity for the Years ended December 31, 2021, 2020 and 2019 44
Statements of Cash Flows for the Years ended December 31, 2021, 2020 and 2019 45
Notes to Financial Statements - December 31, 2021 46
We have audited the accompanying statements of financial position of Erie Indemnity Company (the Company) as of December
31, 2021 and 2020, the related statements of operations, comprehensive income, shareholders’ equity and cash flows for each of
the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “financial
statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the
Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in
the period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(2013 framework) and our report dated February 24, 2022 expressed an unqualified opinion thereon.
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
39
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that
was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that
are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The
communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole,
and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on
the accounts or disclosures to which it relates.
Description of For the year ended December 31, 2021, the Company’s administrative services reimbursement
the Matter revenue totaled $638.5 million. The Company’s primary function, as attorney-in-fact, is to
perform certain services on behalf of the subscribers at the Erie Insurance Exchange
(Exchange) and its insurance subsidiaries, in accordance with the Subscriber’s Agreement and
the service agreements with each of the Exchange’s insurance subsidiaries. As explained in
Note 2 of the financial statements, pursuant to approved service agreements, administrative
services, which include costs associated with claims handling services, life insurance related
operating activities, investment management, and operating overhead incurred by the
Company on behalf of the Exchange and its insurance subsidiaries, are reimbursed to the
Company at cost and recorded as administrative services reimbursement revenue. To
determine the proportional cost allocation to each entity, the Company determines utilization
statistics using numerous variables including, among others, employee count, square footage,
vehicle count, and project hours.
Auditing management’s proportional cost allocations was complex due to the number of costs
that are included in the allocations and the judgment applied in determining the utilization
statistics used to determine the proportional allocations to each entity.
How We We obtained an understanding, evaluated the design and tested the operating effectiveness of
Addressed the controls over the Company’s proportional cost allocations process. This included, among
Matter in Our others, testing management’s review controls over the determination of the utilization
Audit statistics and ultimate allocation of costs to the Exchange and its insurance subsidiaries.
To test the Company’s proportional cost allocations, our procedures included, among others,
evaluating that the costs included in the allocations are in accordance with the Subscriber’s
Agreement and the service agreements with each of the Exchange’s insurance subsidiaries.
We tested the completeness and accuracy of the costs subjected to allocation through testing
of the reconciliation of the costs recorded in the source systems to the costs that are allocated.
We evaluated the allocation of costs to the Exchange and its insurance subsidiaries with the
costs allocated in prior periods.
Cleveland, OH
February 24, 2022
40
ERIE INDEMNITY COMPANY
STATEMENTS OF OPERATIONS
Years ended December 31, 2021, 2020 and 2019
(dollars in thousands, except per share data)
2021 2020 2019
Operating revenue
Management fee revenue - policy issuance and renewal services $ 1,913,166 $ 1,841,794 $ 1,810,457
Management fee revenue - administrative services 58,286 59,463 57,204
Administrative services reimbursement revenue 638,483 609,435 582,010
Service agreement revenue 24,042 25,797 27,627
Total operating revenue 2,633,977 2,536,489 2,477,298
Operating expenses
Cost of operations - policy issuance and renewal services 1,677,397 1,588,897 1,537,949
Cost of operations - administrative services 638,483 609,435 582,010
Total operating expenses 2,315,880 2,198,332 2,119,959
Operating income 318,097 338,157 357,339
Investment income
Net investment income 62,177 29,753 34,059
Net realized and unrealized investment gains 4,946 6,392 6,103
Net impairment recoveries (losses) recognized in earnings 209 (3,278) (195)
Total investment income 67,332 32,867 39,967
See accompanying notes to Financial Statements. See Note 13, "Accumulated Other Comprehensive Income (Loss)", for
amounts reclassified out of accumulated other comprehensive income (loss) into the Statements of Operations.
41
ERIE INDEMNITY COMPANY
STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 2021, 2020 and 2019
(in thousands)
2021 2020 2019
Net income $ 297,860 $ 293,304 $ 316,821
See accompanying notes to Financial Statements. See Note 13, "Accumulated Other Comprehensive Income (Loss)", for
amounts reclassified out of accumulated other comprehensive income (loss) into the Statements of Operations.
42
ERIE INDEMNITY COMPANY
STATEMENTS OF FINANCIAL POSITION
At December 31, 2021 and 2020
(dollars in thousands, except per share data)
2021 2020
Assets
Current assets:
Cash and cash equivalents $ 183,702 $ 161,240
Available-for-sale securities 38,396 17,697
Equity securities 0 19
Receivables from Erie Insurance Exchange and affiliates, net 479,123 494,637
Prepaid expenses and other current assets 56,206 52,561
Accrued investment income 6,303 6,146
Total current assets 763,730 732,300
Shareholders' equity
Class A common stock, stated value $0.0292 per share; 74,996,930 shares
authorized; 68,299,200 shares issued; 46,189,068 shares outstanding 1,992 1,992
Class B common stock, convertible at a rate of 2,400 Class A shares for one Class B
share, stated value $70 per share; 3,070 shares authorized; 2,542 shares issued and
outstanding 178 178
Additional paid-in-capital 16,496 16,487
Accumulated other comprehensive loss (25,288) (78,143)
Retained earnings 2,495,190 2,393,624
Total contributed capital and retained earnings 2,488,568 2,334,138
Treasury stock, at cost; 22,110,132 shares held (1,167,828) (1,163,670)
Deferred compensation 21,738 17,580
Total shareholders' equity 1,342,478 1,188,048
Total liabilities and shareholders' equity $ 2,242,057 $ 2,117,122
43
ERIE INDEMNITY COMPANY
STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 2021, 2020 and 2019
(dollars in thousands, except per share data)
Accumulated
Class A Class B Additional other Total
common common paid-in- comprehensive Retained Deferred shareholders'
stock stock capital (loss) income earnings Treasury stock compensation equity
Balance, December 31, 2018 $ 1,992 $ 178 $ 16,459 $ (130,284) $ 2,231,417 $ (1,157,625) $ 11,535 $ 973,672
Net income 316,821 316,821
Other comprehensive income 13,416 13,416
Dividends declared:
Class A $3.665 per share (169,283) (169,283)
Class B $549.75 per share (1,397) (1,397)
Net purchase of treasury stock (1) 24 0 24
Deferred compensation (2,208) 2,208 0
Rabbi trust distribution (2) 923 (923) 0
Balance, December 31, 2019 $ 1,992 $ 178 $ 16,483 $ (116,868) $ 2,377,558 $ (1,158,910) $ 12,820 $ 1,133,253
Cumulative effect adjustment (3) (1,075) (1,075)
Net income 293,304 293,304
Other comprehensive income 38,725 38,725
Dividends declared:
Class A $5.93 per share (273,902) (273,902)
Class B $889.50 per share (2,261) (2,261)
Net purchase of treasury stock (1) 4 0 4
Deferred compensation (5,465) 5,465 0
Rabbi trust distribution (2) 705 (705) 0
Balance, December 31, 2020 $ 1,992 $ 178 $ 16,487 $ (78,143) $ 2,393,624 $ (1,163,670) $ 17,580 $ 1,188,048
Net income 297,860 297,860
Other comprehensive income 52,855 52,855
Dividends declared:
Class A $4.215 per share (194,687) (194,687)
Class B $632.25 per share (1,607) (1,607)
Net purchase of treasury stock (1) 9 0 9
Deferred compensation (5,131) 5,131 0
Rabbi trust distribution (2) 973 (973) 0
Balance, December 31, 2021 $ 1,992 $ 178 $ 16,496 $ (25,288) $ 2,495,190 $ (1,167,828) $ 21,738 $ 1,342,478
(1) Net purchases of treasury stock in 2019, 2020 and 2021 includes the repurchase of our Class A common stock in the open market that were subsequently distributed to satisfy
stock based compensation awards. See Note 10, "Incentive and Deferred Compensation Plans".
(2) Distributions of our Class A shares were made from the rabbi trust to a retired director and an incentive compensation deferral plan participant in 2019, 2020 and 2021. See
Note 10, "Incentive and Deferred Compensation Plans".
(3) The Cumulative effect adjustment in 2020 is related to the implementation of credit loss allowance accounting guidance effective January 1, 2020. See Note 2, "Significant
Accounting Policies."
44
ERIE INDEMNITY COMPANY
STATEMENTS OF CASH FLOWS
Years ended December 31, 2021, 2020 and 2019
(in thousands)
2021 2020 2019
Cash flows from operating activities
Management fee received $ 1,982,092 $ 1,887,537 $ 1,845,075
Administrative services reimbursements received 634,300 587,347 588,255
Service agreement revenue received 24,014 25,797 27,627
Net investment income received 45,830 35,740 36,442
Commissions paid to agents (966,285) (928,864) (895,563)
Agents bonuses paid (123,583) (108,227) (115,795)
Salaries and wages paid (204,279) (188,070) (186,460)
Employee benefits paid (32,836) (33,098) (42,728)
General operating expenses paid (235,294) (253,545) (236,128)
Administrative services expenses paid (632,530) (598,753) (582,528)
Income taxes paid (84,494) (82,576) (72,817)
Interest paid (4,141) (693) (853)
Net cash provided by operating activities 402,794 342,595 364,527
Net increase (decrease) in cash and cash equivalents 22,462 (175,499) 70,322
Cash and cash equivalents, beginning of year 161,240 336,739 266,417
Cash and cash equivalents, end of year $ 183,702 $ 161,240 $ 336,739
See accompanying notes to Financial Statements. See Note 17, "Supplementary Data on Cash Flows", for additional
supplemental cash flow information.
45
ERIE INDEMNITY COMPANY
NOTES TO FINANCIAL STATEMENTS
Erie Indemnity Company ("Indemnity", "we", "us", "our") is a publicly held Pennsylvania business corporation that has since
its incorporation in 1925 served as the attorney-in-fact for the subscribers (policyholders) at the Erie Insurance Exchange
("Exchange"). The Exchange, which also commenced business in 1925, is a Pennsylvania-domiciled reciprocal insurer that
writes property and casualty insurance.
Our primary function as attorney-in-fact is to perform policy issuance and renewal services on behalf of the subscribers at the
Exchange. We also act as attorney-in-fact on behalf of the Exchange with respect to all claims handling and investment
management services, as well as the service provider for all claims handling, life insurance, and investment management
services for its insurance subsidiaries, collectively referred to as "administrative services". Acting as attorney-in-fact in these
two capacities is done in accordance with a subscriber's agreement (a limited power of attorney) executed individually by each
subscriber (policyholder), which appoints us as their common attorney-in-fact to transact certain business on their behalf.
Pursuant to the subscriber's agreement for acting as attorney-in-fact in these two capacities, we earn a management fee
calculated as a percentage of the direct and affiliated assumed premiums written by the Exchange.
The policy issuance and renewal services we provide to the Exchange are related to the sales, underwriting and issuance of
policies. The sales related services we provide include agent compensation and certain sales and advertising support services.
Agent compensation includes scheduled commissions to agents based upon premiums written as well as additional
commissions and bonuses to agents, which are earned by achieving targeted measures. Agent compensation comprised
approximately 66% of our 2021 policy issuance and renewal expenses. The underwriting services we provide include
underwriting and policy processing and comprised approximately 10% of our 2021 policy issuance and renewal expenses. The
remaining services we provide include customer service and administrative support. We also provide information technology
services that support all the functions listed above that comprised approximately 11% of our 2021 policy issuance and renewal
expenses. Included in these expenses are allocations of costs for departments that support these policy issuance and renewal
functions.
By virtue of its legal structure as a reciprocal insurer, the Exchange does not have any employees or officers. Therefore, it
enters into contractual relationships by and through an attorney-in-fact. Indemnity serves as the attorney-in-fact on behalf of
the Exchange with respect to its administrative services. The Exchange's insurance subsidiaries also utilize Indemnity for these
services in accordance with the service agreements between each of the subsidiaries and Indemnity. Claims handling services
include costs incurred in the claims process, including the adjustment, investigation, defense, recording and payment functions.
Life insurance management services include costs incurred in the management and processing of life insurance business.
Investment management services are related to investment trading activity, accounting and all other functions attributable to the
investment of funds. Included in these expenses are allocations of costs for departments that support these administrative
functions. The amounts incurred for these services are reimbursed to Indemnity at cost in accordance with the subscriber's
agreement and the service agreements. State insurance regulations require that intercompany service agreements and any
material amendments be approved in advance by the state insurance department.
Our results of operations are tied to the growth and financial condition of the Exchange. If any events occurred that impaired
the Exchange’s ability to grow or sustain its financial condition, including but not limited to reduced financial strength ratings,
disruption in the independent agency relationships, significant catastrophe losses, or products not meeting customer demands,
the Exchange could find it more difficult to retain its existing business and attract new business. A decline in the business of
the Exchange almost certainly would have as a consequence a decline in the total premiums paid and a correspondingly adverse
effect on the amount of the management fees we receive. We also have an exposure to a concentration of credit risk related to
the unsecured receivables due from the Exchange for its management fee and cost reimbursements. See Note 15,
"Concentrations of Credit Risk".
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Note 2. Significant Accounting Policies
Basis of presentation
The accompanying financial statements have been prepared in conformity with U.S. generally accepted accounting principles
("GAAP").
Use of estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those
estimates.
For assets measured at amortized cost for which a current expected credit loss allowance was required, we adopted the guidance
using the modified-retrospective approach. At January 1, 2020, we recorded current expected credit loss allowances related to
agent loans of $0.8 million and receivables from Erie Insurance Exchange and affiliates of $0.6 million. This resulted in the
recording of a cumulative effect adjustment, net of taxes, to retained earnings of $1.1 million. Our available-for-sale
investments are not measured at amortized cost, and therefore do not require the use of a current expected credit loss model.
Any credit losses, however, are required to be recorded as an allowance for credit losses rather than a reduction of the carrying
value of the asset. For available-for-sale securities, we adopted the guidance using the prospective approach and recorded an
initial allowance for credit losses of $0.6 million at March 31, 2020.
Cash and cash equivalents – Cash, money market accounts and other short-term, highly liquid investments with a maturity of
three months or less at the date of purchase, are considered cash and cash equivalents.
Investments
Available-for-sale securities – Fixed maturity debt securities and redeemable preferred stock are classified as available-for-sale
and reported at fair value with unrealized investment gains and losses, net of income taxes, recognized in other comprehensive
income. Available-for-sale securities with a remaining maturity of 12 months or less and any security that we intend to sell as
of the reporting date are classified as current assets.
Available-for-sale securities in an unrealized loss position are evaluated to determine whether the impairment is a result of
credit loss or other factors. If we have the intent to sell or it's more likely than not that we would be required to sell the security
before recovery of the amortized cost basis, the entire impairment is recognized in earnings. Securities that have experienced a
decline in fair value that we do not intend to sell, and that we will not be required to sell before recovery, are evaluated to
determine if the decline in fair value is credit related. Impairment resulting from a credit loss is recognized in earnings with a
corresponding allowance on the balance sheet. Future recoveries of credit loss result in an adjustment to the allowance and
earnings in the period the credit conditions improve. Factors considered in the evaluation of credit loss include the extent to
which fair value is less than cost and fundamental factors specific to the issuer such as financial condition, changes in credit
ratings, near and long-term business prospects and other factors, as well as the likelihood of recovery of the amortized cost of
the security. If the qualitative review indicates credit impairment, the allowance for credit loss is measured as the amount that
the security’s amortized cost exceeds the present value of cash flows expected to be collected and is limited to the amount that
fair value is below amortized cost.
Equity securities – Equity securities primarily include non-redeemable preferred stocks and are reported at fair value with
changes in fair value recognized in net realized and unrealized investment gains (losses). Securities that we intend to sell as of
the reporting date are classified as current assets.
Realized gains and losses and investment income – Realized gains and losses on sales of available-for-sale and equity securities
are recognized in income based upon the specific identification method and reported in net realized and unrealized investment
gains (losses). Interest income is recognized as earned and includes amortization of premium and accretion of discount.
Income is recognized based on the constant effective yield method, which includes periodically updated prepayment
assumptions obtained from third party data sources on our prepaying securities. The effective yield for prepaying securities is
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recalculated on a retrospective basis. Dividend income is recognized at the ex-dividend date. Interest and dividend income and
the results of our limited partnership investments are reported as net investment income. We do not record an allowance for
credit losses on accrued investment income as any amount deemed uncollectible is reversed from interest income in the period
the expected payment defaults.
Deferred taxes
Deferred tax assets and liabilities are recorded for temporary differences between the tax basis of assets and liabilities and the
reported amounts in the financial statements, using the statutory tax rates in effect for the year in which the differences are
expected to settle or be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the
results of operations in the period that includes the enactment date under the law. The need for valuation allowances on
deferred tax assets are estimated based upon our assessment of the realizability of such amounts.
Fixed assets
Fixed assets are stated at cost less accumulated depreciation and amortization. Fixed assets are primarily comprised of
software, which includes internally used capitalized software and development costs, as well as building and building
improvements, equipment, furniture and fixtures, and leasehold improvements. Assets in use are depreciated using the straight-
line method over the estimated useful life except for leasehold improvements, which are depreciated over the shorter of their
economic useful life or the lease term. Software is depreciated over periods ranging from 3-7 years, buildings and building
improvements are depreciated over 20-45 years, equipment is depreciated over 3-10 years, and furniture and fixtures are
depreciated over 7 years. We review long-lived assets for impairment whenever events or changes indicate that the carrying
value may not be recoverable. Under these circumstances, if the fair value were less than the carrying amount of the asset, we
would recognize a loss for the difference. We capitalize applicable interest charges incurred during the construction period of
significant long-term building projects as part of the historical cost of the asset.
Agent loans
Agent loans, the majority of which are senior secured, are carried at unpaid principal balance net of a current expected credit
loss allowance with interest recorded in investment income as earned. The allowance is estimated using available loss history
and/or external loss rates based on comparable loan losses and considers current conditions and forecasted information.
Changes to the allowance are recognized in earnings as adjustments to net impairment losses. The current portion of agent
loans is recorded in prepaid expenses and other current assets.
Other assets
Other assets primarily include limited partnership investments which are recorded using the equity method of accounting.
Other assets also include operating lease assets and other long-term prepaid assets.
Management fee revenue allocated to the policy issuance and renewal services is recognized at the time of policy issuance or
renewal, because it is at the time of policy issuance or renewal when the economic benefit of the service we provide (the
substantially completed policy issuance or renewal service) and the control of the promised asset (the executed insurance
policy) transfers to the customer.
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Management fee revenue allocated to the second performance obligation relates to us acting as the attorney-in-fact on behalf of
the Exchange, as well as the service provider for its insurance subsidiaries, with respect to the administrative services and is
recognized over a four-year period representing the time over which the economic benefit of the services provided (i.e.
management of the administrative services) transfers to the customer.
Administrative services
By virtue of its legal structure as a reciprocal insurer, the Exchange does not have any employees or officers. Therefore, it
enters into contractual relationships by and through an attorney-in-fact. Indemnity serves as the attorney-in-fact on behalf of
the Exchange with respect to its administrative services in accordance with the subscriber's agreement. The Exchange's
insurance subsidiaries also utilize Indemnity for these services in accordance with the service agreements between each of the
subsidiaries and Indemnity. Claims handling services include costs incurred in the claims process, including the adjustment,
investigation, defense, recording and payment functions. Life insurance management services include costs incurred in the
management and processing of life insurance business. Investment management services are related to investment trading
activity, accounting and all other functions attributable to the investment of funds. Included in these expenses are allocations of
costs for departments that support these administrative functions. Common overhead expenses and certain service department
costs incurred by us on behalf of the Exchange and its insurance subsidiaries are reimbursed by the proper entity based upon
relevant utilization statistics (employee count, square footage, vehicle count, project hours, etc.) specifically measured to
accomplish proportional allocations, which we believe are reasonable. The expenses we incur and related reimbursements we
receive for administrative services are presented gross in our Statement of Operations. Reimbursements are settled on a
monthly basis. The amounts incurred for these services are reimbursed to Indemnity at cost in accordance with the subscriber's
agreement and the service agreements. State insurance regulations require that intercompany service agreements and any
material amendments be approved in advance by the state insurance department.
Reclassification
Certain amounts previously reported in the 2020 financial statements have been reclassified for comparative purposes to
conform to the current period’s presentation. "Federal income taxes recoverable" is now included in "Prepaid expenses and
other current assets" in the Statements of Financial Position.
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Note 3. Revenue
The majority of our revenue is derived from the subscriber’s agreement between us and the subscribers (policyholders) at the
Exchange. Pursuant to the subscriber’s agreement, we earn a management fee calculated as a percentage, not to exceed 25%, of
all direct and affiliated assumed written premiums of the Exchange. We allocate a portion of our management fee revenue,
currently 25% of the direct and affiliated assumed written premiums of the Exchange, between the two performance obligations
we have under the subscriber’s agreement. The first performance obligation is to provide policy issuance and renewal services
to the subscribers (policyholders) at the Exchange, and the second is to act as attorney-in-fact on behalf of the Exchange, as
well as the service provider for its insurance subsidiaries, with respect to all administrative services.
The transaction price, including management fee revenue and administrative service reimbursement revenue, includes variable
consideration and is allocated based on the estimated standalone selling prices developed using industry information and other
available information for similar services. A constraining estimate of variable consideration exists related to the potential for
management fees to be returned if a policy were to be cancelled mid-term. Management fees are returned to the Exchange when
policyholders cancel their insurance coverage mid-term and premiums are refunded to them. The constraining estimate is
determined using the expected value method, based on both historical and current information. The estimated transaction price,
as reduced by the constraint, reflects consideration expected for performance of our services. We update the transaction price
and the related allocation at least annually based upon the most recent information available or more frequently if there have
been significant changes in any components considered in the transaction price.
The first performance obligation is to provide policy issuance and renewal services that result in executed insurance policies
between the Exchange or one of its insurance subsidiaries and the subscriber (policyholder). The subscriber (policyholder),
receives economic benefits when substantially all the policy issuance or renewal services are complete and an insurance policy
is issued or renewed by the Exchange or one of its insurance subsidiaries. It is at the time of policy issuance or renewal that the
allocated portion of revenue is recognized.
The Exchange, by virtue of its legal structure as a reciprocal insurer, does not have any employees or officers. Therefore, it
enters into contractual relationships by and through an attorney-in-fact. Indemnity serves as the attorney-in-fact on behalf of
the Exchange with respect to its administrative services in accordance with the subscriber's agreement. The Exchange's
insurance subsidiaries also utilize Indemnity for these services in accordance with the service agreements between each of the
subsidiaries and Indemnity. Collectively, these services represent a second performance obligation under the subscriber’s
agreement and the service agreements. The revenue allocated to this performance obligation is recognized over a four year
period representing the time over which these services are provided. The portion of revenue not yet earned is recorded as a
contract liability in the Statements of Financial Position. For the years ended December 31, 2021, 2020, and 2019, Indemnity
recognized revenue of $36.9 million, $35.9 million, and $33.9 million, respectively, that was included in the contract liability
balance at the beginning of the respective periods. The administrative services expenses we incur and the related
reimbursements we receive are recorded gross in the Statement of Operations.
Indemnity records a receivable from the Exchange for management fee revenue when the premium is written or assumed from
affiliates by the Exchange. Indemnity collects the management fee from the Exchange when the Exchange collects the
premiums from the subscribers (policyholders). As the Exchange issues policies with annual terms only, cash collections
generally occur within one year.
The following table disaggregates revenue by our two performance obligations for the years ended December 31:
(in thousands) 2021 2020 2019
Management fee revenue - policy issuance and renewal services $ 1,913,166 $ 1,841,794 $ 1,810,457
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Note 4. Earnings Per Share
Class A and Class B basic earnings per share and Class B diluted earnings per share are calculated under the two-class method.
The two-class method allocates earnings to each class of stock based upon its dividend rights. Class B shares are convertible
into Class A shares at a conversion ratio of 2,400 to 1. See Note 12, "Capital Stock".
Class A diluted earnings per share are calculated under the if-converted method, which reflects the conversion of Class B shares
to Class A shares. Diluted earnings per share calculations include the dilutive effect of assumed issuance of stock-based awards
under compensation plans that have the option to be paid in stock using the treasury stock method. See Note 10, "Incentive and
Deferred Compensation Plans".
A reconciliation of the numerators and denominators used in the basic and diluted per-share computations is presented as
follows for each class of common stock:
(dollars in thousands,
except per share data) For the years ended December 31,
2021 2020 2019
Allocated Weighted Per- Allocated Weighted Per- Allocated Weighted Per-
net income shares share net income shares share net income shares share
(numerator) (denominator) amount (numerator) (denominator) amount (numerator) (denominator) amount
Class A – Basic EPS:
Income available to
Class A stockholders $ 295,421 46,188,806 $ 6.40 $ 290,902 46,188,659 $ 6.30 $ 314,227 46,188,836 $ 6.80
Dilutive effect of stock-
based awards 0 17,696 — 0 23,901 — 0 30,224 —
Assumed conversion of
Class B shares 2,439 6,100,800 — 2,402 6,100,800 — 2,594 6,100,800 —
Class A – Diluted EPS:
Income available to Class
A stockholders on
Class A equivalent
shares $ 297,860 52,307,302 $ 5.69 $ 293,304 52,313,360 $ 5.61 $ 316,821 52,319,860 $ 6.06
Class B – Basic EPS:
Income available to Class
B stockholders $ 2,439 2,542 $ 959 $ 2,402 2,542 $ 945 $ 2,594 2,542 $ 1,020
Class B – Diluted EPS:
Income available to Class
B stockholders $ 2,438 2,542 $ 959 $ 2,401 2,542 $ 945 $ 2,593 2,542 $ 1,020
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Note 5. Fair Value
Valuation techniques used to derive the fair value of our available-for-sale and equity securities are based upon observable and
unobservable inputs. Observable inputs reflect market data obtained from independent sources. Unobservable inputs reflect
our own assumptions regarding fair market value for these securities. Financial instruments are categorized based upon the
following characteristics or inputs to the valuation techniques:
• Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can
access at the measurement date.
• Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either
directly or indirectly.
Estimates of fair values for our investment portfolio are obtained primarily from a nationally recognized pricing service. Our
Level 1 securities are valued using an exchange traded price provided by the pricing service. Pricing service valuations for
Level 2 securities include multiple verifiable, observable inputs including benchmark yields, reported trades, broker/dealer
quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data. Pricing service valuations for
Level 3 securities are based upon proprietary models and are used when observable inputs are not available or in illiquid
markets.
Although virtually all of our prices are obtained from third party sources, we also perform internal pricing reviews, including
evaluating the methodology and inputs used to ensure that we determine the proper classification level of the financial
instrument and reviewing securities with price changes that vary significantly from current market conditions or independent
price sources. Price variances are investigated and corroborated by market data and transaction volumes. We have reviewed
the pricing methodologies of our pricing service as well as other observable inputs and believe that the prices adequately
consider market activity in determining fair value.
In limited circumstances we adjust the price received from the pricing service when, in our judgment, a better reflection of fair
value is available based upon corroborating information and our knowledge and monitoring of market conditions such as a
disparity in price of comparable securities and/or non-binding broker quotes. In other circumstances, certain securities are
internally priced because prices are not provided by the pricing service.
When a price from the pricing service is not available, values are determined by obtaining broker/dealer quotes and/or market
comparables. When available, we obtain multiple quotes for the same security. The ultimate value for these securities is
determined based upon our best estimate of fair value using corroborating market information. As of December 31, 2021,
nearly all of our available-for-sale and equity securities were priced using a third party pricing service.
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The following tables present our fair value measurements on a recurring basis by asset class and level of input as of:
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We review the fair value hierarchy classifications each reporting period. Transfers between hierarchy levels may occur due to
changes in available market observable inputs.
(1) These amounts are reported as net investment income and net realized and unrealized investment gains (losses) for each of the periods presented
above.
(2) Transfers into and/or (out) of Level 3 are primarily attributable to the availability of market observable information and the re-evaluation of the
observability of pricing inputs.
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Note 6. Investments
Available-for-sale securities
See Note 5, "Fair Value" for additional fair value disclosures. The following tables summarize the cost and fair value, net of
credit loss allowance, of our available-for-sale securities as of:
December 31, 2021
Amortized Gross unrealized Gross unrealized Estimated fair
(in thousands) cost gains losses value
Corporate debt securities $ 565,997 $ 9,663 $ 2,495 $ 573,165
Collateralized debt obligations 115,344 456 338 115,462
Commercial mortgage-backed securities 88,636 1,465 777 89,324
Residential mortgage-backed securities 140,217 1,007 1,302 139,922
Other debt securities 23,859 197 136 23,920
U.S. Treasury 4,226 73 7 4,292
Total available-for-sale securities, net $ 938,279 $ 12,861 $ 5,055 $ 946,085
The amortized cost and estimated fair value of available-for-sale securities at December 31, 2021, are shown below by
remaining contractual term to maturity. Expected maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment penalties.
December 31, 2021
Amortized Estimated
(in thousands) cost fair value
Due in one year or less $ 38,061 $ 38,396
Due after one year through five years 409,379 414,588
Due after five years through ten years 195,937 197,733
Due after ten years 294,902 295,368
Total available-for-sale securities $ 938,279 $ 946,085
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The below securities have been evaluated and determined to be temporary declines in fair value for which we expect to recover
our entire principal plus interest. The following tables present available-for-sale securities based on length of time in a gross
unrealized loss position as of:
December 31, 2021
Less than 12 months 12 months or longer
g Total
Fair Unrealized Fair Unrealized Fair Unrealized No. of
(dollars in thousands) value losses value losses value losses holdings
g
Corporate debt securities $ 179,281 $ 1,912 $ 12,494 $ 583 $ 191,775 $ 2,495 441
Collateralized debt obligations 64,270 278 9,370 60 73,640 338 104
Commercial mortgage-backed securities 28,001 595 917 182 28,918 777 61
Residential mortgage-backed securities 89,460 1,278 441 24 89,901 1,302 98
Other debt securities 14,576 136 0 0 14,576 136 24
U.S. Treasury 388 7 0 0 388 7 1
Total available-for-sale securities $ 375,976 $ 4,206 $ 23,222 $ 849 $ 399,198 $ 5,055 729
Quality breakdown of available-for-sale
securities:
Investment grade $ 330,697 $ 3,801 $ 17,112 $ 434 $ 347,809 $ 4,235 366
Non-investment grade 45,279 405 6,110 415 51,389 820 363
Total available-for-sale securities $ 375,976 $ 4,206 $ 23,222 $ 849 $ 399,198 $ 5,055 729
(1) Equity in earnings (losses) of limited partnerships includes both realized gains (losses) and unrealized valuation changes. Our limited partnership
investments are included in the line item "Other assets" in the Statements of Financial Position. We have made no new significant limited
partnership commitments since 2006, and the balance of limited partnership investments is expected to decline over time as additional distributions
are received.
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Realized and unrealized investment gains (losses)
Realized and unrealized gains (losses) on investments were as follows for the years ended December 31:
(in thousands) 2021 2020 2019
Available-for-sale securities:
Gross realized gains $ 6,884 $ 3,920 $ 6,258
Gross realized losses (
(1,753)) (
(2,585)) (
(1,639))
Net realized gains on available-for-sale securities 5,131 1,335 4,619
Equity securities (186) 5,056 1,484
Miscellaneous 1 1 0
Net realized and unrealized investment gains $ 4,946 $ 6,392 $ 6,103
The portion of net unrealized gains and losses recognized during the reporting period related to equity securities held at the
reporting date is calculated as follows for the years ended December 31:
(in thousands) 2021 2020 2019
Equity securities:
Net (losses) gains recognized during the period $ (186) $ 5,056 $ 1,484
Less: net (losses) gains recognized on securities sold (76) ((469)) 360
Net unrealized (losses) gains recognized on securities held at reporting date $ (110) $ 5,525 $ 1,124
Impairments on available-for-sale securities and agent loans were as follows for the years ended December 31:
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Note 7. Fixed Assets
The following table summarizes our fixed assets by category as of December 31:
(in thousands) 2021 2020
Software $ 259,586 $ 196,139
Land, buildings, and building improvements 211,624 121,332
Equipment 42,295 37,426
Furniture and fixtures 21,694 20,998
Leasehold improvements 1,342 1,313
Projects in progress 34,569 47,277
Total fixed assets, gross 571,110 424,485
Less: Accumulated depreciation and amortization (196,308) (159,144)
Fixed assets, net $ 374,802 $ 265,341
Software increased primarily due to internally developed software projects completed and placed in production related to
providing commercial lines new product processing capabilities as well as mainframe and billing software.
On December 31, 2021, we purchased the home office properties from the Exchange at the current appraised value of
$97.5 million in order to align the ownership interest of these facilities with the functions being performed at the home office
campus which are mainly Indemnity's management operations. See Note 14, "Related Party". In 2020, the construction of a
new office building serving as part of our principal headquarters was completed. The building was financed using a senior
secured draw term loan credit facility. See Note 8, "Borrowing Arrangements". Interest capitalized during construction was
$3.5 million and $3.4 million, for the years ended December 31, 2020 and 2019, respectively.
Projects in progress include certain computer software and software developments costs for internal use that are not yet subject
to amortization.
Depreciation and amortization of fixed assets totaled $37.2 million, $21.2 million and $16.8 million for the years ended
December 31, 2021, 2020 and 2019, respectively, and is included in cost of operations - policy issuance and renewal services.
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Note 8. Borrowing Arrangements
The remaining unpaid balance from the Credit Facility is reported at carrying value, net of unamortized loan origination and
commitment fees, as long-term borrowings on our Statements of Financial Position. See Note 5, "Fair Value" for the estimated
fair value of these borrowings.
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Note 9. Postretirement Benefits
Pension plans
Our pension plans consist of a noncontributory defined benefit pension plan covering substantially all employees and an
unfunded supplemental employee retirement plan ("SERP") for certain members of executive and senior management. The
pension plans provide benefits to covered individuals satisfying certain age and service requirements. The defined benefit
pension plan and SERP each provide benefits through a final average earnings formula.
Although we are the sponsor of these postretirement plans and record the funded status of these plans, the Exchange and its
subsidiaries reimburse us for approximately 58% of the annual benefit expense of these plans, which represents pension
benefits for employees performing administrative services and their allocated share of costs for employees in departments that
support the administrative functions. For our funded pension plan, amounts are settled in cash for the portion of pension costs
allocated to the Exchange and its subsidiaries. For our unfunded plans, we pay the obligations when due and amounts are
settled in cash between entities when there is a payout.
Actuarial assumptions
The following table describes the assumptions at December 31 used to measure the year-end obligations and the net periodic
benefit costs for the subsequent year:
2021 2020 2019 2018
Employee pension plan:
Discount rate 3.16 % 2.96 % 3.59 % 4.47 %
Expected return on assets 5.50 6.00 6.00 6.75
Compensation increases (1) 3.21 3.21 3.21 3.32
SERP:
Discount rate – pre-retirement/post-retirement (2) 3.11 2.86 3.59/3.09 4.47/3.97
Rate of compensation increase 5.00 5.00 5.00 5.00
(1) The rate of compensation increase for the employee plan is age-graded. An equivalent single compensation increase rate of 3.21% in 2021, 2020
and 2019 would produce similar results.
(2) In 2020, the SERP discount rate methodology was revised to utilize SERP specific cash outflows independent of the employee pension plan discount
rate, eliminating a difference between pre-retirement and post-retirement rates.
The economic assumptions that have the most impact on the postretirement benefits expense are the discount rate and the long-
term rate of return on plan assets. The discount rate assumption used to determine the benefit obligation for all periods
presented was based upon a yield curve developed from corporate bond yield information.
The pension plan's expected long-term rate of return represents the average rate of return to be earned on plan assets over the
period the benefits included in the benefit obligation are to be paid. To determine the expected long-term rate of return
assumption, we utilized models based upon historical analysis and forward-looking views of the financial markets based upon
key factors such as historical returns for the asset class' applicable indices, the correlations of the asset classes under various
market conditions and consensus views on future real economic growth and inflation. The expected future return for each asset
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class is then combined by considering correlations between asset classes and the volatilities of each asset class to produce a
reasonable range of asset return results within which our expected long-term rate of return assumption falls.
Benefit obligations
Benefit obligations are described in the following tables. Accumulated and projected benefit obligations represent the
obligations of a pension plan for past service as of the measurement date. The accumulated benefit obligation is the present
value of pension benefits earned as of the measurement date based on employee service and compensation prior to that date. It
differs from the projected benefit obligation in that the accumulated benefit obligation includes no assumptions to reflect
expected future compensation. The following table sets forth a reconciliation of beginning and ending balances of the projected
benefit obligation, as well as the accumulated benefit obligation at December 31:
(in thousands)
2021 2020
Projected benefit obligation, beginning of year $ 1,246,159 $ 1,054,467
Service cost for benefits earned 53,041 43,492
Interest cost on benefit obligation 36,824 37,578
Plan amendments 4,059 —
Actuarial (gain) loss (38,400) 134,470
Benefits paid (29,029) (23,848)
Projected benefit obligation, end of year $ 1,272,654 $ 1,246,159
Projected benefit obligations increased $26.5 million at December 31, 2021 compared to December 31, 2020 due primarily to
anticipated plan progression partially offset by actuarial gains resulting from the higher discount rate used to measure the future
benefit obligations. The discount rate increased to 3.16% in 2021 from 2.96% in 2020. The plan amendments during 2021 are
due to the addition of four new participants to the SERP since December 31, 2020.
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Both the defined benefit plan and the SERP had projected benefit obligations in excess of plan assets at December 31:
The SERP had accumulated benefit obligations in excess of plan assets at December 31:
Pension assets
The following table sets forth a reconciliation of beginning and ending balances of the fair value of plan assets at December 31:
(in thousands)
2021 2020
Fair value of plan assets, beginning of year $ 1,081,061 $ 907,625
Actual gain on plan assets 86,966 195,713
Employer contributions 1,245 1,571
Benefits paid (29,029) (23,848)
Fair value of plan assets, end of year $ 1,140,243 $ 1,081,061
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Asset allocation
The employee pension plan utilizes a return seeking and a liability asset matching allocation strategy. It is based upon the
understanding that 1) equity investments are expected to outperform debt investments over the long-term, 2) the potential
volatility of short-term returns from equities is acceptable in exchange for the larger expected long-term returns, and 3) a
portfolio structured across investment styles and markets (both domestic and foreign) reduces volatility. As a result, the
employee pension plan's investment portfolio utilizes a broadly diversified asset allocation across domestic and foreign equity
and debt markets. The investment portfolio is composed of commingled pools and a separate account that are dedicated
exclusively to the management of employee benefit plan assets.
The target and actual asset allocations for the portfolio are as follows for the years ended December 31:
63
The following tables present fair value measurements for the pension plan assets by major category and level of input as of:
December 31, 2021
Fair value measurements of plan assets using:
(in thousands) Total Level 1 Level 2 Level 3
Equity securities:
U.S. equity securities $ 305,440 $ 0 $ 305,440 $ 0
Non-U.S. equity securities 200,949 139,688 61,261 0
Total equity securities 506,389 139,688 366,701 0
Debt securities 620,337 0 620,337 0
Other 13,517 13,517 0 0
Total $ 1,140,243 $ 153,205 $ 987,038 $ 0
Estimates of fair values of the pension plan assets are obtained primarily from the trustee and custodian of our pension plan.
Our Level 1 category includes a money market mutual fund and a separate account for which the fair value is determined using
an exchange traded price provided by the trustee and custodian. Our Level 2 category includes commingled pools. Estimates
of fair values for securities held by our commingled pools are obtained primarily from the trustee and custodian. Trustee and
custodian valuation methodologies for Level 2 securities include multiple verifiable, observable inputs including benchmark
yields, reported trades, broker/dealer quotes, issuers spreads, two-sided markets, benchmark securities, bids, offers, and
reference data.
(in thousands)
Year ending Expected future
December 31, benefit payments
2022 $ 29,730
2023 33,975
2024 36,025
2025 39,813
2026 42,218
2027 - 2031 265,680
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Employee savings plan
All full-time and regular part-time employees are eligible to participate in a qualified 401(k) savings plan. We match 100% of
the participant contributions up to 3% of compensation and 50% of participant contributions over 3% and up to 5% of
compensation. Matching contributions paid to the plan were $16.1 million in 2021, $15.8 million in 2020, and $14.9 million in
2019. The Exchange and its subsidiaries reimbursed us for approximately 59% of the matching contributions. Employees are
permitted to invest the employer-matching contributions in our Class A common stock. Employees, other than executive and
senior officers, may sell the shares at any time without restriction, provided they are in compliance with applicable insider
trading laws; sales by executive and senior officers are subject to additional pre-clearance restrictions imposed by our insider
trading policies. The plan acquires shares in the open market necessary to meet the obligations of the plan. Plan participants
held 0.2 million shares of our Class A common stock at December 31, 2021 and 2020.
We have two incentive plans and two deferred compensation plans for our executives, senior vice presidents and other selected
officers, and two deferred compensation plans for our outside directors.
The LTIP provides the recipient the right to earn performance shares or units, or phantom stock based on the level of
achievement of performance goals as defined by us. Performance measures and a peer group of property and casualty
companies to be used for comparison are determined by the ECDC. The performance measures for all periods presented were
the reported growth in direct written premium and statutory combined ratio of the Exchange and its property and casualty
subsidiaries and return on invested assets over a three-year performance period as compared to the results of the peer group
over the same period. Because the award is based upon a comparison to results of a peer group over a three-year period, the
award accrual is based upon estimates of probable results for the remaining performance period. This estimate is subject to
variability if our results or the results of the peer group are substantially different than the results we project.
The fair value of LTIP awards is measured at each reporting date at the current share price of our Class A common stock. A
liability is recorded and compensation expense is recognized ratably over the performance period.
65
At December 31, 2021, the plan awards for the 2019-2021 performance period, which will be granted as a cash award were
fully vested. Distributions will be made in 2022 once peer group financial information becomes available. The estimated plan
award based upon the peer group information as of September 30, 2021 is $5.4 million. At December 31, 2020, the fully vested
cash awards for the 2018-2020 performance period that were not deferred totaled $10.9 million and were paid to participants in
June 2021. At December 31, 2019, the fully vested cash awards for the 2017-2019 performance period that were not deferred
totaled $7.4 million and were paid to participants in June 2020. At December 31, 2018, the awards paid in cash for the
2016-2018 performance period were fully vested and resulted in a $8.2 million payment to plan participants in June 2019. The
ECDC has determined that the plan awards for the 2020-2022 and 2021-2023 performance periods will be paid in cash.
The Exchange and its subsidiaries reimburse us for compensation costs of employees performing administrative services.
Earned compensation costs are allocated to these entities and reimbursed to us in cash once the payout is made. The total
compensation cost charged to operations related to these LTIP awards, net of forfeitures, was $3.0 million in 2021, $12.0
million in 2020, and $7.3 million in 2019. The related tax benefits recognized in income were $0.6 million in 2021, $2.5
million in 2020, and $1.5 million in 2019. The Exchange and its subsidiaries reimburse us for approximately 46% of the annual
compensation cost of these plans. At December 31, 2021, there was $3.8 million of total unrecognized compensation cost for
non-vested LTIP awards related to open performance periods. Unrecognized compensation is expected to be recognized over a
period of two years.
We also have a deferred stock compensation plan for our outside directors to further align the interests of directors with those of
our shareholders that provides for a portion of the directors' annual compensation in shares of our Class A common stock. Each
director vests in the grant 25% every three months over the course of a year. Dividends paid by us are credited to each
director's account which vest immediately. We do not issue new shares of common stock to directors. Our practice is to
repurchase shares of our Class A common stock in the open market to satisfy these awards, which are held in the rabbi trust.
66
The rabbi trust purchased 5,238 shares of our common stock on the open market at an average price of $212.41 for $1.1 million
in 2021, 7,401 shares at an average price of $201.78 for $1.5 million in 2020, and 7,370 shares at an average price of $194.62
for $1.4 million in 2019 to satisfy the liability of the stock compensation plan for outside directors. The shares are distributed
to the outside director from the rabbi trust upon ending board service. The total compensation charged to operations related to
these awards totaled $0.8 million, $0.9 million and $1.1 million in 2021, 2020 and 2019, respectively.
The following table sets forth a reconciliation of beginning and ending balances of our deferred executive compensation
liability as of December 31:
(in thousands)
2021 2020 2019
Deferred executive compensation, beginning of the year $ 32,223 $ 24,616 $ 26,182
Annual incentive plan awards 6,768 5,619 2,745
Long-term incentive plan awards 3,471 12,381 7,267
Employer match and hypothetical earnings on deferred compensation 3,043 2,962 2,700
Total plan awards and earnings 13,282 20,962 12,712
Total plan awards paid (16,647) (10,121) (12,852)
Compensation deferred 4,765 4,668 1,579
Distributions from the deferred compensation plans (811) (2,081) (797)
Forfeitures (1) (473) (356) —
Funding of rabbi trust for deferred stock compensation plan for outside directors (1,113) (1,493) (1,434)
Funding of rabbi trust for incentive compensation deferral plan (4,018) (3,972) (774)
Deferred executive compensation, end of the year $ 27,208 $ 32,223 $ 24,616
(1) Forfeitures are the result of plan participants who separated from service with the Company and are recognized in the year they occur.
To date, all awards have been satisfied with shares of our Class A common stock. In 2021, we purchased 978 Class A shares
with an average share price of $242.01 and a market value of $0.2 million to satisfy the liability for the 2018 plan year. In
2020, we purchased 1,787 Class A shares with an average share price of $165.82 and a market value of $0.3 million to satisfy
the liability for the 2017 plan year. In 2019, we purchased 3,246 shares with an average share price of $132.35 and a market
value of $0.4 million to satisfy the liability for the 2016 plan year. The total compensation charged to operations related to
these ECP awards was $0.2 million in 2021, $0.7 million in 2020, and $0.5 million in 2019. The Exchange and its subsidiaries
reimburse us for earned compensation costs of employees performing administrative services, which can fluctuate each year
based on the plan participants. The Exchange and its subsidiaries reimbursed us for approximately 33%, 59%, and 49% of the
awards paid in 2021, 2020, and 2019 respectively. Unearned compensation expense of $0.2 million is expected to be
recognized over a period of three years.
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Note 11. Income Taxes
The provision for income taxes consists of the following for the years ended December 31:
(in thousands)
2021 2020 2019
Current income tax expense $ 80,398 $ 80,373 $ 76,535
Deferred income tax (benefit) expense (1,854) (5,162) 3,349
Income tax expense $ 78,544 $ 75,211 $ 79,884
A reconciliation of the provision for income taxes, with amounts determined by applying the statutory federal income tax rate to
pre-tax income, is as follows for the years ended December 31:
(in thousands)
2021 2020 2019
Income tax at statutory rate $ 79,045 $ 77,388 $ 83,308
Tax-exempt interest — — (123)
Decrease in unrecognized tax benefits — — (3,088)
Other, net (501) (2,177) (213)
Income tax expense $ 78,544 $ 75,211 $ 79,884
Temporary differences and carry-forwards, which give rise to deferred tax assets and liabilities, are as follows as of
December 31:
(in thousands)
2021 2020
Deferred tax assets:
Pension and other postretirement benefits $ 21,545 $ 29,065
Other employee benefits 15,273 14,544
Deferred revenue 3,963 3,872
Allowance for management fee returned on cancelled policies 3,330 3,515
Unrealized losses on investments — 1,083
Other 3,484 2,692
Total deferred tax assets 47,595 54,771
Deferred tax liabilities:
Depreciation 35,204 29,978
Unrealized gains on investments 8,713 7,540
Prepaid expenses 2,458 3,800
Other 1,075 1,112
Total deferred tax liabilities 47,450 42,430
Net deferred tax asset $ 145 $ 12,341
If we determine that any of our deferred tax assets will not result in future tax benefits, a valuation allowance must be
established for the portion of the assets that are not expected to be realized. We had no valuation allowance recorded at
December 31, 2021 or 2020.
68
A reconciliation of unrecognized tax benefits for the years ended December 31 is as follows:
(in thousands)
2021 2020 2019
Balance at the beginning of the year $ 0 $ 0 $ 3,088
Additions for prior year tax positions — — 4,631
Reductions for prior year tax positions — — (7,719)
Balance at the end of the year $ 0 $ 0 $ 0
The uncertain tax position including $3.1 million of tax expense and $0.9 million of interest expense recorded in a prior year
was settled during 2019. This settlement reduced our effective tax rate by 1.0% in 2019. The amounts recorded in a prior year
resulted from the difference in measuring the tax liability at the previous tax rate and the current enacted tax rate.
Tax years ending December 31, 2020, 2019 and 2018 remain open to IRS examination. We are not currently under IRS audit,
nor have we been notified of an upcoming IRS audit.
We are the attorney-in-fact for the subscribers (policyholders) at the Exchange, a reciprocal insurance exchange. In that
capacity, we provide all services and facilities necessary to conduct the Exchange's insurance business. Indemnity and the
Exchange together constitute a single insurance business. Consequently, we are not subject to state corporate income or
franchise taxes in states where the Exchange conducts its business and the states collect premium tax in lieu of corporate
income or franchise tax, as a result of the Exchange's remittance of premium taxes in those states.
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Note 12. Capital Stock
Stock repurchases
Our Board of Directors authorized a stock repurchase program effective January 1, 1999 allowing the repurchase of our
outstanding Class A nonvoting common stock. In 2011, our Board of Directors approved a continuation of the current stock
repurchase program for a total of $150 million, with no time limitation. Treasury shares are recorded in the Statements of
Financial Position at total cost based upon trade date. There were no shares repurchased under this program during 2021, 2020
or 2019. We had approximately $17.8 million of repurchase authority remaining under this program at December 31, 2021,
based upon trade date.
We made stock repurchases in 2021, 2020, and 2019 outside of our publicly announced share repurchase program related to
stock-based awards. See Note 10, "Incentive and Deferred Compensation Plans" for additional information.
70
Note 13. Accumulated Other Comprehensive Income (Loss)
Changes in accumulated other comprehensive income ("AOCI") (loss) by component, including amounts reclassified to other
comprehensive income ("OCI") (loss) and the related line item in the Statements of Operations where net income is presented,
are as follows for the year ended December 31:
(in thousands) 2021 2020 2019
Income Income Income
Before Tax Tax Net Before Tax Tax Net Before Tax Tax Net
Investment securities:
AOCI (loss), beginning of
year $ 29,384 $ 6,171 $ 23,213 $ 5,664 $ 1,189 $ 4,475 $ (9,169) $ (1,926) $ (7,243)
OCI (loss) before
reclassifications (16,474) (3,460) (13,014) 22,074 4,636 17,438 19,257 4,044 15,213
Realized investment gains (5,131) (1,078) (4,053) (1,335) (280) (1,055) (4,619) (970) (3,649)
Impairment (recoveries)
losses (57) (12) (45) 2,981 626 2,355 195 41 154
OCI (loss) (21,662) (4,550) (17,112) 23,720 4,982 18,738 14,833 3,115 11,718
AOCI, end of year $ 7,722 $ 1,621 $ 6,101 $ 29,384 $ 6,171 $ 23,213 $ 5,664 $ 1,189 $ 4,475
Total
AOCI (loss), beginning of
year $ (98,916) $ (20,773) $ (78,143) $ (147,936) $ (31,068) $ (116,868) $ (164,918) $ (34,634) $ (130,284)
Investment securities (21,662) (4,550) (17,112) 23,720 4,982 18,738 14,833 3,115 11,718
Pension and other
postretirement plans 88,566 18,599 69,967 25,300 5,313 19,987 2,149 451 1,698
OCI 66,904 14,049 52,855 49,020 10,295 38,725 16,982 3,566 13,416
AOCI (loss), end of year $ (32,012) $ (6,724) $ (25,288) $ (98,916) $ (20,773) $ (78,143) $ (147,936) $ (31,068) $ (116,868)
(1) These components of AOCI (loss) are included in the computation of net periodic pension cost. See Note 9, "Postretirement Benefits", for additional
information.
71
Note 14. Related Party
Management fee
A management fee is charged to the Exchange for services we provide under the subscriber's agreement with subscribers at the
Exchange. The fee is a percentage of direct and affiliated assumed premiums written by the Exchange. This percentage rate is
determined at least annually by our Board of Directors but cannot exceed 25%. The management fee rate charged the Exchange
was 25% in 2021, 2020 and 2019. The Board of Directors elected to maintain the fee at 25% beginning January 1, 2022.
There is no provision in the subscriber's agreement for termination of our appointment as attorney-in-fact by the subscribers at
the Exchange and the appointment is not affected by a policyholder's disability or incapacity.
All transactions within a holding company system affecting the member insurers of the holding company system must be fair
and reasonable and any charges or fees for services performed must be reasonable. Approval by the applicable insurance
commissioner is required prior to the consummation of transactions affecting the members within a holding company system.
Shared facilities
We leased the home office from the Exchange until December 31, 2021, at which time we purchased the home office properties
from the Exchange to align the ownership interest of these facilities with the functions being performed at the home office
campus which are mainly Indemnity's management operations. See Note 7, "Fixed Assets" for additional information. Lease
expense totaled $6.1 million in 2021, 2020 and 2019, respectively. Operating expenses, including utilities, cleaning, repairs,
real estate taxes, property insurance, and leasehold improvements totaled $15.7 million in both 2021 and 2020, respectively,
and $16.7 million in 2019. The Exchange and its subsidiaries reimbursed us for rent costs and related operating expenses of
shared facilities used to perform administrative services, which are allocated based upon usage or square footage occupied.
Reimbursements related to the use of this space totaled $4.8 million, $4.6 million, and $4.2 million in 2021, 2020, and 2019,
respectively.
Effective July 1, 2021, the Exchange and its subsidiaries entered into a service agreement with Indemnity to use space in
Indemnity-owned properties. The amount charged is based on rental rates of like property in Erie, Pennsylvania and the usage
or square footage occupied. In 2021, income earned from the Exchange and its subsidiaries for the use of space totaled
$0.2 million. Operating expenses including utilities, cleaning, repairs, real estate taxes, property insurance, and leasehold
improvements are allocated based upon usage or square footage occupied. The home office was added to this agreement
effective January 1, 2022.
Financial instruments could potentially expose us to concentrations of credit risk, including our unsecured receivables from the
Exchange. A large majority of our revenue and receivables are from the Exchange and its affiliates. See also Note 1, "Nature
of Operations". Net management fee amounts and other reimbursements due from the Exchange and its affiliates were $479.1
million and $494.6 million at December 31, 2021 and 2020, respectively. Upon adoption of ASU 2016-13, we recorded an
allowance for current expected credit losses of $0.6 million related to the receivables from the Exchange and affiliates. See also
Note 2, "Significant Accounting Policies". The current expected credit loss allowance was $0.5 million and $0.6 million at
December 31, 2021 and 2020, respectively.
72
Note 16. Commitments and Contingencies
In 2020, we entered into an agreement with a bank for the establishment of a loan participation program for agent loans. The
maximum amount of loans to be funded through this program is $100 million. We have committed to fund a minimum of 30%
of each loan executed through this program. As of December 31, 2021, the total loans executed under this agreement totaled
$25.8 million, of which our portion of the loans is $9.6 million. Additionally, we have agreed to guarantee a portion of the
funding provided by the other participants in the program in the event of default. As of December 31, 2021, our maximum
potential amount of future payments on the guaranteed portion is $2.9 million. All loan payments under the participation
program are current as of December 31, 2021.
We are involved in litigation arising in the ordinary course of conducting business. In accordance with current accounting
standards for loss contingencies and based upon information currently known to us, we establish reserves for litigation when it
is probable that a loss associated with a claim or proceeding has been incurred and the amount of the loss or range of loss can
be reasonably estimated. When no amount within the range of loss is a better estimate than any other amount, we accrue the
minimum amount of the estimable loss. To the extent that such litigation against us may have an exposure to a loss in excess of
the amount we have accrued, we believe that such excess would not be material to our financial condition, results of operations,
or cash flows. Legal fees are expensed as incurred. We believe that our accruals for legal proceedings are appropriate and,
individually and in the aggregate, are not expected to be material to our financial condition, results of operations, or cash flows.
We review all litigation on an ongoing basis when making accrual and disclosure decisions. For certain legal proceedings, we
cannot reasonably estimate losses or a range of loss, if any, particularly for proceedings that are in their early stages of
development or where the plaintiffs seek indeterminate damages. Various factors, including, but not limited to, the outcome of
potentially lengthy discovery and the resolution of important factual questions, may need to be determined before probability
can be established or before a loss or range of loss can be reasonably estimated. If the loss contingency in question is not both
probable and reasonably estimable, we do not establish an accrual and the matter will continue to be monitored for any
developments that would make the loss contingency both probable and reasonably estimable. In the event that a legal
proceeding results in a substantial judgment against, or settlement by, us, there can be no assurance that any resulting liability or
financial commitment would not have a material adverse effect on our financial condition, results of operations, or cash flows.
73
Note 17. Supplementary Data on Cash Flows
A reconciliation of net income to net cash provided by operating activities as presented in the Statements of Cash Flows is as
follows for the years ended December 31:
(in thousands) 2021 2020 2019
No items were identified in this period subsequent to the financial statement date that required adjustment or additional
disclosure.
74
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
As required by the Securities and Exchange Commission Rule 13a-15(e), we carried out an evaluation, under the supervision
and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2021. Based upon the
foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were
effective.
Our independent auditor, Ernst & Young LLP, a registered public accounting firm, has issued an attestation report on our
internal control over financial reporting. This report appears on the following page.
There was no additional information in the fourth quarter of 2021 that has not already been filed in a Form 8-K.
75
Report of Independent Registered Public Accounting Firm
We have audited Erie Indemnity Company’s internal control over financial reporting as of December 31, 2021, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (2013 framework) (the COSO criteria). In our opinion, Erie Indemnity Company (the Company) maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2021, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the statements of financial position of the Company as of December 31, 2021 and 2020, and the related statements
of operations, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended
December 31, 2021 and the related notes of the Company and our report dated February 24, 2022 expressed an unqualified
opinion thereon.
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report
on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control
over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Cleveland, OH
February 24, 2022
76
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information with respect to our outside directors, audit committee and audit committee financial experts and
Section 16(a) beneficial ownership reporting compliance, is incorporated herein by reference to the information statement on
Schedule 14C to be filed with the Securities and Exchange Commission no later than 120 days after December 31, 2021.
We have adopted a Code of Conduct that applies to all of our outside directors, officers and employees. We have previously
filed a copy of the Code of Conduct as Exhibit 14.3 to the Registrant's Form 10-K filed with the Securities and Exchange
Commission on February 25, 2016. In addition to this, we have adopted a Code of Ethics for Senior Financial Officers that also
applies to our Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer and any other person performing
similar functions. We have previously filed a copy of the Code of Ethics for Senior Financial Officers as Exhibit 14.4 to the
Registrant's Form 8-K filed with the Securities and Exchange Commission on June 1, 2016. Our Code of Conduct and Code of
Ethics for Senior Financial Officers are also available on our website at www.erieinsurance.com.
Gregory J. Gutting 58 Executive Vice President and Chief Financial Officer since August
2016; Interim Executive Vice President and Chief Financial Officer,
October 2015 through July 2016; Senior Vice President and
Controller, March 2009 through September 2015; Director, EFL,
EIC, Flagship, ENY and EPC.
Robert C. Ingram, III * 63 Executive Vice President and Chief Information Officer since
August 2012; Director, EFL, EIC, Flagship, ENY and EPC.
Douglas E. Smith 47 Executive Vice President, Sales & Products since November 2016;
Senior Vice President, Personal Lines, November 2008 through
October 2016.
77
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item with respect to executive compensation is incorporated by reference to the information
statement on Schedule 14C to be filed with the Securities and Exchange Commission no later than 120 days after December 31,
2021.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information with respect to security ownership of certain beneficial owners and management and securities authorized for
issuance under equity compensation plans, is incorporated by reference to the information statement on Schedule 14C to be
filed with the Securities and Exchange Commission no later than 120 days after December 31, 2021.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information with respect to certain relationships with our outside directors is incorporated by reference to the information
statement on Schedule 14C to be filed with the Securities and Exchange Commission no later than 120 days after December 31,
2021.
The information required by this item is incorporated by reference to the information statement on Schedule 14C to be filed
with the Securities and Exchange Commission no later than 120 days after December 31, 2021.
78
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
1. Financial Statements
Included in Part II, Item 8. "Financial Statements and Supplementary Data" contained in this report.
Page
3. Exhibit Index 80
None.
79
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the date indicated.
Board of Directors:
85
Member • Erie Insurance Group
Home Office • 100 Erie Insurance Place on Perry Square • Erie, Pennsylvania 16530
814.870.2000 • erieinsurance.com • An Equal Opportunity Employer